m 


LIBRARY 

OF  THE 

UNIVERSITY  OF  CALIFORNIA. 


Class  ' 


A 

GRADED  BANKING  SYSTEM 

FORMED  BY  THE  INCORPORATION  OF 

CLEARING  HOUSES  UNDER 

A  FEDERAL  LAW 

WITH  POWER  TO  ISSUE  A  CLEARING  HOUSE 

CURRENCY  SECURED  BY  PLEDGE 

OF  BANK  ASSETS 

FOR  THE  PROTECTION  AND  SUPPORT  OF  COMMERCIAL 

CREDIT,  AND  THE  EQUALIZATION  OF  RATES 

OF  INTEREST  THROUGHOUT 

THE  NATION 

BY 

THEODORE   OILMAN 


'     -'•- 

The 

IVERS: 


BOSTON   AND   NEW   YORK 
HOUGHTON,  MIFFLIN  AND  COMPANY 


1898 


"A  national  bank  might  be  established  with  more  regard  to 
its  functions  of  regulating  currency  than  to  its  function  of  dis- 
count."—  Daniel  Webster,  in  his  speech  of  March  12,  1838. 

"  I  am  of  opinion,  sir,  that  we  want  paper  of  universal  credit, 
and  which  is  convertible  into  specie  at  the  will  of  the  holder."  — 
Daniel  Webster,  in  his  speech  delivered  September  28,  1837. 

"  The  essential  interests  of  the  country  imperiously  demand 
that  every  bank  bill  declared  to  be  lawful  money  shall  be  able  to 
circulate  equally  in  all  parts  of  the  land."  —  Charter  of  the  Bank 
of  France,  1847. 


COPYRIGHT,  1898, 

BY  HOUGHTON,  MIFFLIN  &  CO. 

ALL  RIGHTS  RESERVED. 


CONTENTS 


PAGE 

PREFACE v-xvi 

I. 

THE  SEPARATION  OF  BANKING  FUNCTIONS  ,  1 


II. 

A  COMPARISON  BETWEEN  GRADED  AND  UNGRADED  OR 
COOPERATIVE  AND  COMPETITIVE  SYSTEMS 6 

III. 

THE  ENGLISH  SYSTEM 14 

IV. 

THE  FRENCH  SYSTEM 22 

V. 

THE  GERMAN  SYSTEM 31 

VI. 

THE  UNITED  STATES  SYSTEM 38 

/ 

VII. 

A  DISCUSSION  OF  THE  CONDITION  OF  BANKING  RESERVES 
IN  THE  UNITED  STATES  AS  THE  CAUSE  OF  OUR  FINANCIAL 
TROUBLES  .  .  49 

VIII. 

FALLACIOUS  REMEDIES  65 


iv  CONTENTS 

IX. 

A  DISCUSSION  OF  PRACTICAL  DIFFICULTIES  IN  THE  WAY 
OF  A  UNIVERSAL  SYSTEM 72 

X. 

STATEMENT  MADE  BEFORE  SUB-COMMITTEE  No.  2  OF  THE 
COMMITTEE  ON  BANKING  AND  CURRENCY  (A  BILL  TO 
PROTECT  AND  SUPPORT  CREDIT,  130-151) 98 

XI. 

THE  COMPLETION  OF  THE  NATIONAL  BANKING  SYSTEM    .  152 

i 

XII. 
FIXED  AND  REDEEMABLE  CURRENCY 159 

XIII. 

THE  PHILOSOPHY  OF  THE  HISTORY  OF  BANK  CURRENCY 
IN  THE  UNITED  STATES 178 

APPENDIX. 

STATEMENTS  OF  THE  VIEWS  OF  VARIOUS  WRITERS  RE- 
FERRED TO  IN  THE  PREFACE 209 

INDEX  231 


;- 

o 
DIVERSITY 

OF 


PREFACE 

THE  object  of  the  discussion  in  this  book  is  to 
point  out  the  inherent  weakness  of  an  ungraded 
banking  system,  by  which  forced  liquidations  and 
resulting  panic  are  the  legal  methods  for  preserv- 
ing solvency,  and  to  offer  a  remedy  in  a  graded 
system  formed  by  the  incorporation  of  clearing 
houses  under  a  general  federal  law  with  power  to 
issue  a  clearing  house  currency,  as  a  means  to 
secure  stability  and  to  prevent  panics.  The  effort 
also  is  made  to  show  the  harmony  of  a  graded 
system  with  the  political  principles  of  our  country. 

CONSIDERATION    OF    GOVERNMENT    CURRENCY 

EXCLUDED. 

No  reference  is  made  to  the  currency  of  the 
government,  because  it  is  believed  that  a  surplus 
revenue  from  an  adequate  tariff  and  restriction  of 
expenditures  will  cure  all  of  its  ills.  The  govern- 
ment is  like  any  corporation  or  individual  having 
notes  outstanding  payable  on  demand.  The  dif- 
ference is  only  in  amount,  but  not  in  kind.  The 
same  rules  are  applicable  to  the  government  as 
to  smaller  corporations  or  to  individuals.  If  the 
government  has  a  surplus  income  and  a  reasonable 


vi  PREFACE 

percentage  of  its  demand  obligations  in  cash  on 
hand,  its  finances  will  move  along  without  diffi- 
culty. 

The  constitutional  right  and  power  of  the  gov- 
ernment to  issue  a  legal  tender  currency  is  sus- 
tained by  authorities  which  include  President  Mad- 
ison, Daniel  Webster,  and  the  Supreme  Court  of 
the  United  States.  One  at  least  of  the  financial 
writers  with  whom  the  framers  of  the  Constitution 
were  familiar  used  the  phrase  "  to  coin  paper 
money,"  and  it  is  a  question  whether  it  cannot  be 
fairly  claimed  that  the  words  in  the  Constitution, 
"to  coin  money,"  were  not  intended  to  include  the 
power  to  coin  paper  money  as  well  as  metallic. 
As  a  matter  of  economic  and  financial  policy,  the 
nation  is  practically  a  unit  in  approving  the  issue 
of  legal  tender  notes.  As  a  financial  measure, 
the  withdrawal  of  the  legal  tenders  would  produce 
widespread  distress  and  confusion  in  commercial 
affairs,  and  the  country  could  not  endure  it  for  a 
moment.  One  who  believes  in  the  desirability  of 
retirement  necessarily  has  110  confidence  in  the  per- 
manence of  the  ability  or  willingness  of  the  govern- 
ment to  maintain  its  obligations  at  par  with  gold. 
If  he  is  willing  to  go  to  the  expense  of  amassing  an 
additional  coin  reserve  of  $200,000,000,  and  of 
paying  $5,000,000  annual  interest  on  the  bonds 
issued  to  procure  it,  his  lack  of  confidence  amounts 
almost  to  a  panic-stricken  condition.  The  country 
does  not  share  in  this  solicitude.  Confidence  has 


PREFACE  vii 

been  restored.  The  endless  chain  has  been  started 
in  the  other  direction,  and  as  long  as  the  present 
business  policy  of  the  government  is  maintained 
the  greenbacks  can  cause  the  country  no  harm 
and  are  a  decided  benefit.  The  prevailing  feeling 
is  in  favor  of  letting  the  notes  of  the  govern- 
ment alone.  If  they  were  retired  with  gold  and 
the  gold  thereafter  sent  out  of  the  country,  there 
would  be  a  great  restriction  of  business  and  con- 
sequent distress. 

CONFIDENCE   RESTORED. 

The  most  serious  evil  of  our  present  situation  is 
no  longer  the  threatened  degradation  of  our  mone- 
tary standard.  The  government's  credit  has  been 
adequately  protected  by  the  sound  money  victory  of 
1896,  which  is  to  be  ascribed  to  the  patriotic  assist- 
ance rendered  to  sound  money  Republicans  by 
sound  money  Democrats.  The  business  of  the 
country  has  been  put  upon  a  firm  basis  by  a  con- 
fidence-inspiring tariff,  and  no  further  legislation 
in  regard  to  the  nation's  finances  or  obligations  is 
required.  Manufactures  and  general  business  are 
beginning  again  to  flourish.  Sound  money  and  a 
protective  tariff  are  the  two  pillars  on  which  the 
prosperity  of  the  country  rests.  Economy  should 
be  the  foundation  stone.  The  country  looks  for- 
ward to  the  future  with  well-founded  confidence. 
Added  to  these  propitious  circumstances,  a  golden 
shower  is  falling  on  our  farmers,  and  upon  all  who 


vin  PREFA  CE 

are  dependent  on  them,  caused  by  favoring  con- 
ditions of  trade  at  home  and  abroad. 

But  there  is  a  cloud  upon  the  horizon.  It  is  the 
diminishing  bank  reserves.  They  are  drawing 
near  the  apprehension  minimun.  We  ask  where 
is  the  trouble  ?  and  every  department  of  business 
says,  It  is  not  in  me  !  We  are  unerringly  guided 
to  see  that  the  trouble  is  located  in  that  creation 
of  the  law  which  we  call  our  banking  system.  All 
business  is  working  smoothly  except  that.  The 
trouble  comes  from  the  fact  that  everything  is 
protected  except  banking  reserves.  All  eyes  are 
on  them. 

We  therefore  must  first  inquire,  What  is  our  sys- 
tem, and  wherein  does  it  differ  from  others,  and 
what  is  the  cause  of  the  apprehension  which  exists  ? 
All  other  questions  being  eliminated  by  the  sound 
money  victory,  the  passage  of  the  tariff  bill,  the 
revival  of  business  and  manufactures,  and  the  high 
prices  for  farm  products,  we  are  able  to  see  what 
remains  to  be  adjusted.  From  a  business  stand- 
point nothing  remains  but  the  banking  system. 

DISTINCTION  BETWEEN   GRADED   AND   UNGRADED 

SYSTEMS. 

Ours  is  an  ungraded  system.  An  ungraded  sys- 
tem is  one  in  which  each  bank  is  a  counterpart 
and  equal  of  every  other  bank.  The  United  States 
has  not  reached  this  system  by  any  haphazard 
method.  It  is  the  result  of  the  orderly  develop- 


PREFACE  ix 

ment  of  banking  under  republican  institutions. 
We  will  not  tolerate  a  Bank  of  the  United  States, 
nor  banks  of  great  capital  under  special  charters 
with  branches  in  all  the  States.  These  methods  of 
banking  may  thrive  under  forms  of  government 
different  from  ours,  but  here  they  do  not  thrive,  or 
rather  they  are  not  allowed  to  live.  Our  political 
institutions  are  not  compatible  with  them.  But  our 
institutions  do  allow  the  existence  of  a  state  bank, 
with  branches  only  within  the  State,  or  of  indi- 
vidual banks  of  equal  standing  before  the  law,  or- 
ganized under  a  general  law.  Under  our  national 
banking  law,  which  is  the  product  of  our  institu- 
tions, individual  national  banks  are  created,  and 
under  state  laws  individual  state  banks  are  like- 
wise. The  prevailing  characteristic  of  all  the  banks 
of  the  United  States,  both  state  and  national,  is 
that  they  are  all  of  one  grade,  they  are  uniform, 
and  therefore  ungraded ;  that  is,  no  banks  are 
higher  in  grade,  or  powers,  or  privileges  than  any 
other. 

The  absence  of  grade  necessitates  competition. 
Each  individual  bank  must  take  care  of  itself. 
There  is  110  provision  for  mutual  support  or  for 
united  action  in  an  ungraded  system.  Every  bank 
must  make  good  its  reserve  within  thirty  days 
after  notice,  under  threat  of  a  receivership,  and  no 
arrangement  is  made  for  assistance.  Competition 
and  strife  are  a  necessary  sequence  of  this  re- 
quirement. Confusion  and  panic  are  its  results. 


x  PREFACE 

Every  bank's  hand  is  against  its  neighbor,  and 
a  state  of  mutually  destructive  war  follows  the 
first  appearance  of  danger.  From  this  prevailing 
and  preeminent  characteristic  has  arisen  the  more 
accurately  descriptive  name  of  the  Competitive 
system.  An  ungraded  system  is  necessarily  com- 
petitive and  not  cooperative. 

A  graded  system  of  banks  is  one  which  provides 
a  higher  order  or  orders  of  financial  corporations, 
the  grades  being  distinguished  one  from  another 
by  a  difference  in  powers  and  functions,  and  yet 
united  to  each  other  as  are  courts  of  law,  grades 
in  executive  and  legislative  offices,  or  rank  in  the 
army  and  navy.  We  have  no  difficulty  in  thinking 
of  grades  in  connection  with  these  departments, 
and  we  know  that  order,  stability,  efficiency,  co- 
operation, and  peace  are  secured  by  their  means. 
Gradation  enters  necessarily  into  the  idea  of  any 
system,  and  must  be  established  if  harmonious 
interaction  is  to  be  secured  and  competition  and 
strife  are  to  be  avoided.  A  graded  system  of 
banks  is  as  necessary  for  stability  and  peace  in 
commerce  as  are  superior  and  inferior  courts  of 
law  in  the  ordinary  affairs  of  life ;  and  appeals  for 
aid  and  counselare  as  necessary  in  one  sphere  as 
the  other. 

Order  is  said  to  be  Heaven's  first  law.  Grada- 
tion introduces  order  and  constitutes  a  system. 
Gradation  transforms  a  mob  into  an  army.  A 
graded  banking  system  is  a  financial  army.  Its 


PREFACE  xi 

objects  are  to  protect  and  support  commercial 
credit,  that  is,  the  credit  of  all  persons,  firms,  and 
corporations  engaged  in  commercial  transactions, 
and  to  defend  the  business  community  from  the 
assaults  of  distrust  and  panic.  These  are  the  chief 
objects  of  the  measure  advocated  in  this  book.  No 
other  banking  plan  now  before  the  country  pro- 
poses as  its  chief  end  to  do  this.  History  and 
experience  show  that  this  protection  and  support 
can  only  be  given  by  a  graded  banking  system. 

It  is  proposed  to  form  this  system  in  our  coun- 
try by  the  incorporation  of  clearing  houses  under 
a  federal  law  and  with  federal  supervision.  Clear- 
ing houses  are  now  either  voluntary  organizations 
or  are  incorporated  under  the  laws  of  the  different 
States  in  which  they  are  located.  Their  functions 
are  of  vast  importance  to  the  community,  and 
federal  supervision  is  a  necessity  to  introduce 
uniformity  and  to  protect  individual  banks  from 
arbitrary  action. 

It  is  proposed  to  make  the  banking  system  thus 
constituted  a  protection  and  support  to  the  com- 
mercial community  by  giving  to  the  largest  clear- 
ing houses,  at  least  to  one  in  each  State,  the  power, 
under  proper  restrictions,  to  receive  from  their 
bank  members,  bank  assets  approved  by  a  loan 
committee,  and  issue  to  them  a  clearing  house  cur- 
rency at  seventy-five  per  cent,  of  the  value  of  the 
collateral  pledged,  receivable  at  all  clearing  houses 
throughout  the  nation  at  par. 


xii  PREFACE 

The  result  of  this  system,  it  is  claimed,  would 
be  to  protect  and  deliver  the  country  from  panics, 
to  equalize  interest  rates  in  all  sections,  and  thus 
to  foster  and  develop  foreign  and  domestic  trade 
and  commerce,  and  promote  the  welfare  of  the 
entire  country. 

A  comparison  between  graded  and  ungraded 
systems  is  given  at  length  in  chapters  ii.  to  vi. 
inclusive. 

BUSINESS   MEN   WANT   STABILITY. 

If  a  business  man  is  asked  what  he  wants  of  a 
banking  system,  he  will  reply  that,  given  a  uniform 
measure  of  value  and  legal  restrictions  which  will 
secure  prudent  bank  management,  he  wants  free- 
dom from  panics  and  facility  in  getting  money  for 
legitimate  purposes  on  good  collateral  at  all  sea- 
sons and  in  all  localities.  The  one  word  "  stabil- 
ity "will  describe  all  his  wants.  Stability  in  the 
value  of  the  dollar,  in  the  credit  of  the  banks,  in 
the  monetary  situation,  and  in  the  rate  of  inter- 
est. A  banking  system  to  be  satisfactory  to  him 
must  assure  these  advantages.  A  banking  sys- 
tem is  created  by  law  to  facilitate  business.  That 
is  its  chief  object,  and  incidentally  it  is  supposed 
tha,t  the  business  of  banking  will  be  sufficiently 
remunerative  to  attract  enough  capital  to  meet 
the  requirements  of  the  public  for  banking  facili- 
ties. 

If  an    official  bank  manager  is  asked  what  he 


PREFACE  xiii 

wants  of  a  banking  system,  he  will  reply  -  -  all  pro- 
visions which  will  enable  him  to  make  the  most 
profit  and  the  fewest  losses  and  leave  hi,m  the  most 
free  in  the  management  of  his  bank.  His  wants 
are  all  centred  around  his  interests  in  his  bank. 
He  can  bank  on  any  measure  of  value,  he  trusts 
himself  and  his  board  for  prudent  management,  he 
proposes  to  take  care  of  himself  and  his  bank  in 
any  panic,  and  as  to  facility  in  supplying  money, 
he  is  rather  pleased  to  see  rates  of  interest  ad- 
vance. 

From  the  nature  of  the  case  the  business  man 
represents  the  whole  country,  and  the  bank  man- 
ager represents  a  part  of  it  only. 

It  is  evident  that  the  whole  country  should  have 
more  consideration  than  a  part.  A  vessel  or  an 
implement  is  made  for  the  use  and  benefit  of  the 
maker,  and  it  should  not  say  to  the  maker,  Why 
hast  thou  made  me  thus  ? 

A  banking  system  is  not  made  primarily  for  the 
benefit  of  banks,  but  of  commerce.  "  Banks,"  said 
Webster,  "  are  made  for  the  borrowers.  They  are 
made  for  the  good  of  the  many  and  not  for  the 

• 

good  of  the  few."  Care  should  be  taken  by  legis- 
lators to  have  the  business  of  banking  sufficiently 
profitable,  but  the  first  care  should  be  to  give  the 
public  what  they  need. 

The  constitutional  power  to  do  this  is  Congress, 
and  the  order  in  which  the  subject  should  be  con- 
sidered, under  the  overruling  guidance  of  the  polit- 


xiv  PREFACE 

ical  principles  of  our  government,  is,  first,  What 
are  the  wants  of  the  whole  country,  its  commerce 
and  its  business  men  ?  and,  second,  What  do  the 
individual  interests  of  the  bank  require  ? 

To  produce  a  satisfactory  system  there  must  be 
cooperation  between  three  interests,  the  represent- 
atives of  the  political  power,  the  commerce  of  the 
country  and  its  banking  interests,  each  in  subor- 
dination to  the  other. 

DEVELOPMENT   OF   THIS    BOOK. 

The  proposal  for  a  graded  system  of  banks,  as 
discussed  in  the  following  pages,  was  first  advanced 
by  the  writer  during  the  panic  of  1893,  under  date 
of  July  25th  of  that  year,  in  the  article  entitled 
"The  Completion  of  the  National  Banking  Sys- 
tem," which  will  be  found  on  page  152  of  this 
book. 

The  conclusions  therein  stated  were  arrived  at 
independently,  from  experience  of  the  troubles  then 
prevailing,  and  from  a  conviction  that  some  means 
must  be  provided  to  protect  our  country  from  the 
disasters  of  constantly  recurring  panics.  A  study 
of  methods  adopted  by  the  New  York  Clearing 
House,  in  the  issue  of  clearing  house  certificates, 
led  to  the  central  idea  of  these  pages  that  clearing- 
houses should  be  incorporated  under  a  general 
federal  law  and  brought  under  government  super- 
vision as  a  prerequisite  to  the  conferring  of  any 
powers  upon  them.  By  thus  constituting  them 


PREFACE  xv 

corporate  bodies,  the  national  banking  system 
would  reach  completion.  The  subject  expanded 
under  an  investigation,  which  resulted  in  the  pre- 
paration of  various  articles  all  leading  to  the  same 
thought,  -  -  the  "  Carthago  delenda  est '  of  this 
book. 

The  years  which  followed  1893  were  so  disturbed 
that  the  investigation  never  lost  its  interest  and 
was  always  timely.  Finally  in  December,  1895,  the 
writer  prepared  a  bill  embodying  his  views,  and  it 
was  introduced  into  the  House  of  Representatives, 
January  7,  1896,  as  H.  R.  No.  3338.  A  hearing 
before  the  Committee  on  Banking  and  Currency 
followed,  and  the  preparation  of  several  articles 
in  further  explanation  and  defense  of  the  central 
idea  of  incorporation.  These  various  writings  have 
been  gathered  together  in  this  book,  which,  there- 
fore, represents  and  describes  the  development  and 
growth  of  a  thought  which  had  its  rise  as  a  busi- 
ness man's  practical  suggestion  for  the  relief  of 
business  men  in  a  monetary  crisis. 

WORK    OF    OTHERS   IN    SAME    DIRECTION. 

Some  reference  should  be  made  to  the  work  of 
others  in  the  same  direction,  from  which  it  will  be 
seen  that  experienced  writers  have  suggested  that 
the  functions  of  the  clearing  house  be  used,  in  one 
way  or  another,  as  a  means  to  secure  stability  in 
commerce  and  relief  from  panics. 

In  the  Appendix  will  be  found  statements  of  the 


xvi  PREFA  CE 

views  of  Charles  Parsons  of  St.  Louis,  Edward 
Atkinson  of  Boston,  the  late  Adolph  Ladenburg 
of  New  York,  Hon.  Joseph  H.  Walker  of  Massa- 
chusetts, and  others. 

T.  G. 
NEW  YORK,  January,  1898. 


A   GRADED   BANKING   SYSTEM 


THE  SEPAKATION  OF  BANKING  FUNCTIONS 

ADVOCATED    BY    DANIEL    WEBSTER     AND     SAMUEL    JONES 
LOYD. THE   RESULT   OF   THE    PANIC    OF   1837 

WHEN  this  country  was  emerging  from  the  panic 
of  1837,  which  was  caused  by  the  lodgment  with 
individual  banks  of  the  power  to  issue  bank  notes 
to  circulate  as  money  at  the  discretion  of  their 
boards  of  directors,  Daniel  Webster,  the  greatest 
statesman  and  most  profound  student  of  bank 
currency  our  country  has  produced,  made  many 
speeches  on  the  currency  question,  both  before 
Congress  and  on  special  occasions. 

With  that  catastrophe  —  the  most  disastrous  of 
its  kind  the  world  has  ever  seen  —  before  his  mind, 
and  seeking  a  mode  for  the  avoidance  of  similar 
occurrences  in  the  future,  he  said  in  his  speech  de- 
livered in  Congress  on  the  17th  of  March,  1838  : 
"  A  national  bank  might  be  established  with  more 
regard  to  its  functions  of  regulating  currency  than 
to  its  functions  of  discount." 

Methods  of  regulating  the  currency  were  then 
under  discussion  in  England  and  the  United  States ; 


2     SEPARATION  OF  BANKING  FUNCTIONS 

but  Webster's  opinion  preceded  any  departure  from 
the  model  given  in  1696  by  the  formation  of  the 
Bank  of  England. 

The  separation  of  the  issue  of  bank  currency 
from  other  banking  functions  was  first  legally  en- 
acted in  the  State  of  New  York  by  the  passage  of 
the  free  banking  law  on  April  18,  1838.  A  simi- 
lar event  took  place  in  England  in  1844,  when  the 
Peel  charter  of  the  Bank  of  England  was  enacted. 
The  credit  of  this  change  is  due  to  Colonel  Tor- 
rens  and  Samuel  Jones  Loyd,  a  leader  in  financial 
discussions.  The  latter,  in  his  pamphlet  published 
in  1840,  shows  intimate  acquaintance  with  banking 
conditions  in  this  country,  and  quotes  Webster's 
utterances  with  approval. 

The  New  York  law  and  Peel's  charter  effected 
the  only  radical  change  in  the  issue  of  bank  cur- 
rency made  since  1696.  The  issue  of  bank  cur- 
rency had  always  been  under  the  control  of  the 
directors  of  individual  banks  without  exception 
from  1696  to  1838. 

Webster  said,  as  we  have  seen,  that  he  could 
conceive  of  a  bank's  being  organized  with  more 
regard  to  its  functions  of  regulating  the  currency 
than  its  functions  of  discount.  This  phrase  "to 
regulate  the  currency  '  is  now  obsolete,  and  by  it 
was  understood  merely  the  rules  and  methods  by 
which  currency  is  issued  and  the  amount  thereof 
controlled  for  the  promotion  of  commerce  and  the 
prevention  of  panics.  But  it  is  a  question  whether 
mere  separation  of  the  functions  of  a  bank  such 
as  was  accomplished  in  1838  and  1844  fulfills 


WEBSTER'S    SUGGESTIONS  3 

either  Webster's  or  Loyd's  idea.  It  is  evident 
from  S.  J.  Loyd's  writings  that  he  endeavored  to 
incorporate  that  idea  fully  in  the  present  Bank 
charter.  "  Separate,"  he  wrote  to  a  Manchester 
merchant,  "  the  management  of  the  circulation, 
that  is,  in  other  words,  the  power  of  creating 
money,  from  banking  business :  vest  that  power 
exclusively  in  one  body ;  make  all  its  measures  in 
that  capacity  perfectly  public  ;  let  not  the  borrow- 
ers of  money  -  -  government  and  commerce  -  -  ap- 
proach with  their  dangerous  and  seductive  influ- 
ences the  creator  of  money ;  but  send  them  where 
their  application  ought  always  to  be  made,  to  the 
subordinate  distributers  of  it ;  let  the  manager  of 
the  circulation  be  raised  above  all  reach,  and  let 
him  thenceforth  remain,  like  the  sun  in  our  system, 
by  one  never  varying  influence,  regulating,  con- 
trolling, invigorating  everything  around  him,  but 
himself  influenced  and  moved  by  none."  The 
New  York  law  of  1838  was  also  in  the  same  direc- 
tion. But  both  the  New  York  law  and  the  Bank 
charter  contain  only  the  beginning,  or  the  half,  of 
Webster's  suggestion. 

He  proposed  the  formation  of  a  bank  to  perform 
the  functions  of  currency  issues.  A  bank  means  a 
corporation  chartered  by  law,  and  fully  equipped  to 
transact  business  of  a  special  character.  Neither 
the  New  York  law  nor  the  Bank  charter  creates 
separate  corporations  to  perform  the  functions  of 
currency  issues.  They  only  separate  those  func- 
tions from  the  other  operations  of  the  Bank  and 
provide  that  they  shall  be  performed  by  certain 
officials  of  the  government  or  of  the  Bank. 


4     SEPARATION  OF  BANKING  FUNCTIONS 

The  separation  of  the  function  of  bank  issues 
was  demanded  by  the  great  crash  of  1837,  because 
when  not  separated  the  power  had  been  abused  by 
directors  of  banks  in  the  United  States  during  the 
years  before  1837,  and  had  been  repeatedly  abused 
by  the  directors  of  the  Bank  of  England  from 
1696  to  1844.  If  the  criticism  of  the  directors  of 
the  Bank  had  not  been  loud  and  deep,  separation 
could  not  have  been  effected.  If  the  losses  of  1837 
in  this  country  had  not  been  overwhelming,  a  trus- 
teeship for  the  currency  could  riot  have  been  estab- 
lished as  it  was  by  the  New  York  law  of  1838.  The 
separation  was  a  necessity  then,  and  must  always 
continue  so  under  general  laws. 

It  was  not  merely  separation  that  Webster  sug- 
gested, but  the  formation  of  a  bank,  or  a  system  of 
banks,  whose  only  function  should  be  the  issue  of 
currency.  The  whole  subject  of  bank  currency 
would  then  be  not  only  separated  from  the  control 
of  deposit  banks  and  their  individual  directors,  but 
confided  to  other  corporations  which  he  conceived 
might  be  created  for  the  sole  purpose  of  doing  all 
that  is  connected  with  the  preparation  and  issue  of 
bank  notes  authorized  to  circulate  as  money.  1 1  is 
idea  is  not  fully  realized  if  separation  only  is  accom- 
plished and  the  matter  handed  over  to  government 
officials.  They  do  not  constitute  a  bank  in  any 
true  sense  of  the  word.  They  constitute  a  banking 
department,  with  routine  duties  to  perform.  '\  lie 
officials  are  limited  by  law  to  certain  specified  acts, 
and  can  exercise  no  discretion  in  the  matter.  Their 
acts  are  not  under  the  supervision  of  a  board  of 


TWO    IMPORTANT    DATES  5 

directors,  nor  do  they  have  any  relation  to  business 
or  commerce.  When  banks  are  established  by  law 
to  perform  the  functions  of  regulating  the  currency 
and  are  limited  to  that  one  purpose,  then  the  Web- 
sterian  idea  will  be  fulfilled.  Mere  separation  does 
not  fulfill  it.  The  same  may  be  said  in  effect  of 
the  suggestions  of  Samuel  Jones  Loyd  in  England. 

There  are  but  two  dates  to  remember  in  the  his- 
tory of  bank  currency.  The  first  is  when  the  Bank 
of  England  was  chartered  and  power  was  given  to 
its  board  of  directors  to  issue  notes  to  circulate  as 
money  and  to  hold  themselves  the  security  on  which 
the  notes  were  based.  The  second  date  is  when 
the  New  York  law  was  passed  in  1838  by  which 
the  power  to  issue  currency  was  separated  from  the 
other  functions  of  banks,  and  banks  desiring  cur- 
rency were  required  to  lodge  security  with  a  state 
official  as  trustee.  The  rights  of  the  public  were 
then  recognized  for  the  first  time  and  an  effort  was 
made  to  protect  them.  This  was  the  natural  out- 
working of  republican  principles. 

The  third  and  final  date  will  be  when  under  a 
general  federal  law  the  incorporation  of  banks  will 
be  authorized  not  to  do  general  business,  but  only 
to  regulate  the  issue  of  currency  by  holding  secur- 
ities pledged  by  commercial  banks  and  acting  as 
trustees  for  the  public.  Then  the  idea  advocated 
both  by  Webster  and  Samuel  Jones  Loyd  will  be 
fully  realized. 


II 


A  COMPARISON  BETWEEN  GRADED  AND  UNGRADED 
OR  COOPERATIVE  AND  COMPETITIVE  SYSTEMS 

FUNDAMENTAL   POLITICAL   PRINCIPLES. 

THE  government  of  the  United  States  in  all  its 
parts  is  based  upon  the  theories  stated  in  the  De- 
claration of  Independence.  All  the  development 
of  our  institutions  must  be  in  harmony  with  those 
theories,  and  be  their  legitimate  outgrowth.  This 
does  not  forbid  us  to  enact  a  law  or  to  adopt  a 
system  similar  in  purpose  and  effect  to  one  pre- 
vailing under  any  form  of  government  other  than 
our  own,  but  it  does  require  that  the  law  and  the 
system  shall  be  made  to  conform  in  their  theory 
and  mode  of  operation  to  the  genius  of  our  institu- 
tions. As  a  result  of  this  practice,  if  steadily 
maintained,  every  part  of  our  government  and  all 
the  institutions  which  grow  up  under  it  would  be 
made  parts  of  an  harmonious  whole.  In  this  way 
only  can  a  government  by  the  people  and  for  the 
people  be  intelligently  constructed  and  fairly  tested. 

These  sentiments  are  now  generally  accepted 
throughout  our  country,  and  they  explain  the  jeal- 
ousy which  exists  of  any  proposal  to  adopt  foreign 
methods  or  follow  monarchical  examples.  This 
jealousy  is  well  founded,  because  most  of  the  sug- 
gestions of  foreign  ideas  come  from  those  who  have 


THE    ORIGIN    OF   PANICS  1 

an  ill-concealed  lack  of  faith  in  republican  institu- 
tions, which  amounts  almost  to  a  desire  to  see 
them  fail.  From  the  beginning  of  our  govern- 
ment to  the  present  time  there  has  been  an  "  eternal 
vigilance '  over  insidious  attempts  to  foist  un- 
American  ideas  upon  us,  by  which  such  encroach- 
ments have  been  resisted. 

EXPERIENCE  OF  OTHER  COUNTRIES. 

Foreign  methods,  on  the  other  hand,  may  be  ex- 
amined with  an  impartial  spirit  to  find  what  is 
good  in  them,  for  the  purpose  of  engrafting  that 
good  upon  our  system.  This  has  been  done  by  all 
our  statesmen,  beginning  with  those  who  composed 
the  convention  for  the  preparation  of  the  Constitu- 
tion of  the  United  States  in  1788,  down  to  the 
Monetary  Commission  a  hundred  years  later.  It 
would  be  an  unreasoning  prejudice,  and  one  igno- 
rant of  the  history  of  the  growth  of  our  govern- 
ment, which  would  object  to  examining  any  subject 
in  the  light  of  the  experience  of  foreign  nations  or 
which  would  refuse  to  recognize  the  advantages 
which  those  nations  may  have  had  to  aid  them  in 
arriving  at  their  conclusions. 

OPINION    OF   THE    CHAMBER   OF   COMMERCE,  PARIS, 

FRANCE. 

For  instance,  the  Chamber  of  Commerce  of 
Paris,  France,  has  placed  upon  record,  before  the 
Commission  appointed  in  1864  to  examine  into  the 
management  of  the  Bank  of  France,  its  opinion 
that  "  it  is  from  England  and  the  United  States 


8  A    COMPARISON  OF  SYSTEMS 

that  come  the  beginnings  of  financial  panics." 
This  is  too  formal  a  statement  to  be  ascribed  to 
prejudice.  It  is  also  one  easy  of  verification  or 
disproof.  If  by  an  examination  into  the  history 
of  panics  the  opinion  of  the  Chamber  of  Commerce 
of  Paris  is  sustained,  then  it  becomes  necessary  to 
know  the  causes  which  make  the  great  English- 
speaking  nations,  England  and  America,  more  lia- 
ble to  commercial  failures  and  financial  panics  than 
the  rest  of  the  civilized  world.  Why  should  they 
be  the  storm  areas  from  which  originate  the  finan- 
cial blizzards  which  burst  out  so  frequently  upon 
the  world's  commerce  ?  Why  should  a  Rothschild 
say  that  "  France  is  in  a  good  situation.  There 
is  no  country  in  the  world  where  business  affairs 
are  more  solidly  established,  or  where  failures  are 
less  numerous  "  ? 

It  concerns  us  in  this  country  to  examine  this 
matter  without  prejudice,  and  to  learn  what  causes 
the  stability  of  Continental  and  the  instability  of 
English  and  American  finances.  If  the  facts  can  be 
discovered  and  stated,  then  the  question  will  arise, 
Can  we  not  modify  our  system  in  accordance  with 
our  traditions  and  institutions  so  as  to  place  our 
finances  upon  a  basis  equally  stable  with  that  of  any 
country  in  the  world  ?  If  it  is  a  matter  of  legisla- 
tion only,  the  country  would  look  to  Congress  to 
pass  the  necessary  laws  to  reach  this  end.  The 
bitter  financial  experience  of  the  past  few  years 
has  made  our  country  ripe  for  the  adoption  of  a 
maturely  considered  measure  based  upon  and  justi- 
fied by  experience. 


THE  MAINTENANCE   OF  STABILITY         9 

STABILITY   THE    FIRST   REQUISITE    OF    A    CREDIT 

SYSTEM. 

It  must  be  premised  that  stability  is  the  first 
requisite  and  chief  excellence  desired  by  commerce 
and  trade,  and  financial  panic  is  the  great  evil 
which  all  wish  to  avoid.  All  the  business  of  the 
civilized  world  is  conducted  on  the  credit  system. 
That  is,  all  sales  and  purchases  are  not  settled  for 
with  an  equal  amount  of  coin.  Only  balances  are 
paid  in  coin.  The  adoption  of  this  principle  means 
the  adoption  of  the  credit  system.  By  stability  is 
meant  the  orderly  working  of  the  credit  system, 
and  by  panic,  its  breaking  down. 

The  chief  agency  by  which  credit  operations  are 
conducted  are  the  banks,  and  their  ability  to  pay 
their  circulating  notes  and  deposits  on  demand  at 
all  times  in  gold  is  the  first  condition  of  stability. 
The  second  condition  of  stability  is  the  ability  of 
the  banks  to  sustain  at  all  times  the  commerce  of 
a  nation  in  a  state  of  quiet  and  freedom  from  mon- 
etary panic  by  supplying  the  legitimate  needs  of 
commerce  with  loans  of  money  at  uniform  and  rea- 
sonable interest  charges.  Stability  describes  the 
condition  of  commerce  and  trade  when  the  banks 
are  able  to  meet  all  demands  upon  them  both  for 
cash  and  discounts.  If  stability  can  be  maintained, 
then  business  transactions  can  be  undertaken,  based 
upon  the  sure  ground  that  no  financial  disturbance 
need  be  anticipated,  and  the  only  question  to  be 
considered  would  be  the  safe  and  remunerative  em- 
ployment of  capital. 


10  A    COMPARISON  OF  SYSTEMS 

The  maintenance  of  stability  is  110  small  under- 
taking, because  the  credit  system  has  become  uni- 
versal, and  obligations  and  commercial  transactions 
are  many  times  greater  than  they  would  be  on  a 
basis  of  barter,  which  is  the  strictly  cash  basis. 

The  general  prosperity  is  so  much  increased 
by  the  activity  of  business  which  results  from  the 
credit  system,  that  the  maintenance  of  its  stability 
or  orderly  working  is  the  most  important  desidera- 
tum in  commerce.  The  problem  is,  how  to  main- 
tain credit  with  the  relatively  small  amount  of  cash 
needed  to  settle  balances,  and  thus  avoid  the  loss 
which  would  result  from  keeping  on  hand  a  larger 
amount  of  idle  capital  in  the  shape  of  superfluous 
cash  reserves. 

RESTRICTION,    EXTRA   LEGAL   MEASURES,    SUSPEN- 
SION. 

It  must  further  be  premised  that  a  banking 
system  may  be  said  to  break  down  when,  under 
financial  pressure,  banking  accommodations  are 
withdrawn  and  cash  payments  are  either  restricted 
or  suspended.  In  order  to  maintain  the  stability 
which  is  the  first  requisite  of  the  credit  system,  a 
great  struggle  will  take  place  before  the  effort  is 
abandoned,  and  recourse  will  be  had  either  to  mea- 
sures provided  by  the  laws  on  which  the  banking 
system  is  founded,  or  to  some  outside  of  the  law, 
or  to  a  suspension  of  the  law  itself. 

Experience  shows  that  the  measures  provided  by 
the  laws  of  the  United  States  and  England  are  not 
adequate  to  maintain  the  orderly  working  of  the 


STABLE  BANKING  SYSTEMS  11 

credit  systems  of  those  countries  under  financial 
pressure.  The  history  of  commerce  in  the  United 
States  is  sufficient  to  prove  the  statement  as  far  as 
it  applies  to  this  country.  No  business  man  will 
care  to  deny  it.  Panics  have  become  the  common 
experience  and  business  has  been  ravaged  by  them 
to  the  point  of  prostration.  The  experience  of 
England  will  be  referred  to  later  on. 

When  legal  methods  for  controlling  panics  and 
producing  stability  are  ineffective,  recourse  must 
be  had  to  extra  legal  measures,  or  to  a  suspension 
of  the  laws  on  which  the  banking  system  is  founded, 
in  order  to  prevent  a  cataclysm.  When  this  alter- 
native takes  place,  the  banking  system  may  be  said 
to  break  down. 

CREDIT   SHOULD   BE   SUSTAINED   BY   LEGAL 

METHODS. 

Conversely,  a  banking  system  may  be  said  to 
prove  its  merit,  if  it  finds  within  the  law  of  its  being 
all  the  resources,  expedients,  and  provisions  needed 
to  carry  it  through  the  severest  strains  without  de- 
rangement of  its  functions  or  disturbance  of  the 
finances  of  the  business  community  it  serves.  The 
banking  systems  of  France  and  Germany  have 
maintained  the  stability  of  commerce  in  those 
countries  for  so  many  years,  that  they  may  fairly 
claim  to  answer  in  the  fullest  degree  these  require- 
ments. 


12  A    COMPARISON  OF  SYSTEMS 

NO    REFERENCE   HERE  TO    GOVERNMENT    FINANCES. 

It  must  be  further  premised  that  we  are  confin- 
ing our  attention  to  commercial  banking  and  not 
to  issues  of  currency  by  the  government,  which  is 
an  entirely  distinct  subject. 

The  money  of  the  government  is  fixed,  and  it  is 
to  be  assumed  that  it  can  be  kept  at  par  with  gold. 
If  so,  the  notes  of  the  government  are  equal  to  a 
metallic  currency,  and  form  the  basis  on  which 
commercial  transactions  are  conducted.  If  they 
are  not  convertible  into  gold  at  par,  it  is  the  duty 
of  the  government  to  reduce  the  amount,  or  to 
increase  the  coin  reserves  until  they  are.  It  is  a 
proper  function  of  the  government  to  provide  a 
paper  currency  in  so  far  as  it  is  maintained  on  an 
equality  with  gold.  The  suggestion  that  the  gov- 
ernment should  go  out  of  the  banking  business 
comes  from  a  confusion  of  ideas  and  has  no  reason 
in  it.  It  is  not  banking  to  provide  a  metallic  cur- 
rency, or  one  equal  to  a  metallic  currency,  any 
more  than  it  is  to  issue  bonds  and  pay  interest. 

It  is  the  duty  of  the  government  to  coin  money, 
and  in  early  writers  we  meet  with  the  expression 
"  to  coin  paper  money."  When  a  government  is 
in  debt  it  is  a  wise  economic  measure  to  coin  as 
much  paper  money  as  can  be  kept  on  a  par  with 
gold.  It  is  a  mode  of  borrowing  without  interest, 
which  the  government  can  legitimately  avail  itself 
of.  There  is  no  principle  of  law,  morals,  political 
economy,  or  commerce,  which  can  be  raised  as  an 
objection  to  a  government  paper  currency  when 


LIMIT  OF  THIS  DISCUSSION  13 

maintained  on  a  par  with  gold.  The  only  objection 
is  in  the  liability  to  over-issue,  which  is  a  tempta- 
tion to  which  governments  have  too  often  suc- 
cumbed with  disastrous  consequences.  The  people 
of  the  United  States  had  this  temptation  presented 
to  them  in  the  last  presidential  campaign,  and  they 
overcame  it  by  an  emphatic  majority.  They  have 
determined  that  they  will  not  sanction  over-issues 
and  will  maintain  the  government  currency  at  a 
par  with  gold.  That  question  need  no  longer  be 
considered. 

The  limit  of  the  subject  we  are  now  attempting 
to  discuss  is  the  consideration  of  commercial  bank- 
ing operations  which  are  conducted  by  citizens  and 
corporations  under  the  laws  and  in  the  money  pro- 
vided by  the  government. 

WHY   DO    FINANCIAL    PANICS    TAKE   THEIR   RISE   IN 
ENGLAND   AND   THE   UNITED     STATES  ? 

We  are  now  ready  to  consider  the  question  why 
financial  panics  take  their  rise  in  the  United  States 
and  England ;  for  that  they  do  is  an  historical  fact 
which  it  is  presumed  will  not  be  disputed.  Reserv- 
ing the  discussion  as  to  the  United  States,  an  out- 
line statement  comparing  the  English,  French,  and 
German  systems  of  banking  becomes  necessary, 
with  special  and  exclusive  reference  to  the  orderly 
working  of  the  credit  system  in  those  countries. 


Ill 

THE  ENGLISH  SYSTEM 

ENGLISH     COMMERCIAL     HONOR     THE     MODEL    OF 

THE   WORLD. 

THE  dominant  position  which  the  British  Em- 
pire has  so  long  held  in  the  commerce  of  the  world 
makes  it  easy  to  assent  to  the  opinion  expressed  by 
Lord  Liverpool  and  the  Chancellor  of  the  Ex- 
chequer, F.  J.  Robinson,  in  a  paper  dated  13th  of 
January,  1826,  in  which  they  said,  "  We  believe 
that  much  of  the  prosperity  of  the  country  [Eng- 
land] for  the  last  century  is  to  be  ascribed  to  the 
general  wisdom,  justice,  and  fairness  of  the  deal- 
ings of  the  Bank  of  England." 

With  any  criticism  that  may  be  made  on  Eng- 
lish banking  must  be  coupled  a  tribute  of  respect 
for  the  sterling  integrity  which  has  been  the  foun- 
dation of  British  supremacy  and  has  made  her 
commercial  honor  the  model  of  the  world. 

ENGLAND'S  FINANCIAL  SYSTEM  FAILS  UNDER 

SEVERE  TEST. 

The  richest  country  in  the  world  and  the  coun- 
try with  the  largest  and  most  active  commerce, 
and  the  country  which  can  compare  its  thinkers 
favorably  with  men  of  the  same  class  in  any  other 


A    CONFESSION  OF  INADEQUACY         15 

nation,  would  be  expected  to  have  the  best  bank- 
ing system  that  experience  and  ingenuity  could 
devise.  But  the  very  tenacity  which  has  made 
its  success  attainable  has  led  England  to  hold  on 
to  its  pounds,  shillings,  and  pence,  and  to  defective 
or  antiquated  methods  which  even  her  own  financial 
authorities  have  long  criticised.  England's  bank- 
ing system  is  among  these,  for  when  it  is  put  to  the 
test  of  a  severe  panic,  it  is  found  to  contain  no 
provision  to  carry  the  country  through  its  difficul- 
ties, and  the  alternative  is  presented  of  either  the 
bankruptcy  of  the  nation  on  the  one  hand,  or  on 
the  other  a  recourse  to  expedients  contrary  to  or 
not  contained  in  its  Bank's  charter.  These  expe- 
dients are  either  the  suspension  of  the  charter,  or 
a  recourse  to  volunteer  methods  to  ward  off  the 
threatened  disaster. 

RELIEF   FROM   SUSPENSION. 

The  suspension  of  the  Bank's  charter  is  evi- 
dently a  confession  of  its  inadequacy,  but  not 
more  so  than  a  recourse  to  volunteer  financiering. 
If  the  system  were  perfect,  it  would  have  within 
itself  the  provision  to  meet  a  panic.  But  in  1847, 
three  years  after  the  grant  of  the  Bank's  charter, 
in  1857,  and  in  1866,  three  crises  occurred,  in  each 
of  which  it  became  apparent  that  if  the  enforce- 
ment of  the  charter  of  1844  was  persisted  in,  the 
business  community  of  England  would  be  ruined. 
Very  wisely  in  each  instance  the  Ministry  advised 
the  directors  of  the  Bank  of  England  to  disregard 
the  law  and  save  the  people,  promising  an  act  of 


16  THE  ENGLISH  SYSTEM 

indemnity.  No  sooner  was  suspension  announced 
on  each  of  these  three  occasions  than  the  money 
stringency  "  vanished  like  a  dream."  The  public 
excitement  was  immediately  calmed,  and  the  panics 
were  abated. 

RELIEF  FROM  VOLUNTEER  METHODS. 

In  1890,  when  the  Baring  panic  occurred,  a 
volunteer  movement  was  undertaken  to  save  the 
country.  Under  the  leadership  of  the  Bank  of 
England  a  fund  of  175.000,000,  to  guarantee  the 
Baring  indebtedness,  was  pledged,  and  a  loan  of 
$25,000,000  was  effected  with  the  Bank  of  France 
and  other  European  banks.  A  volunteer  move- 
ment is  better  than  a  suspension  of  the  charter, 
but  it  means  that  there  is  no  provision  in  the  law 
establishing  the  banking  system  of  England  to 
accomplish  the  desired  end,  and  that  some  outside 
expedient  or  help  must  be  resorted  to.  This  is  as 
much  a  confession  of  its  inadequacy  as  a  suspen- 
sion of  the  Bank's  charter. 

NO    LEGAL    RELIEF   EXCEPT    BY    FORCED    LIQUIDA- 
TIONS. 

The  reason  for  these  break-downs  of  the  Eng- 
lish banking  system  is  that  the  Bank  of  England 
has  no  power  beyond  its  cash  reserves  to  protect 
itself,  much  less  the  banks  of  England,  at  any 
serious  juncture,  except  by  forcing  liquidations 
upon  the  business  community.  When  the  bank 
begins  thus  to  protect  itself,  it  inaugurates  a  panic. 
All  other  banks,  bankers,  and  individuals  in  Eng- 


THE  ENGLISH  RESERVES  17 

land  must  do  the  same,  for  they  are  all  organized 
on  the  same  principle  as  individual  banks,  each 
relying  upon  its  reserves  and  each  competitive  with 
all  the  others  in  a  time  of  panic.  The  panic  in- 
creases until  the  point  of  exhaustion  is  reached, 
and  then  an  abandonment  of  the  theory  on  which 
the  English  banking  system  is  founded  brings 
relief. 

CASH    RESERVES   INADEQUATE. 

The  Bank  cannot  issue  circulating  notes  except 
on  a  small  amount  of  public  securities  and  on  a 
deposit  of  bullion.  These  deposits  of  bullion  form 
its  cash  reserves,  and  are  its  only  resource  to  meet 
a  demand  from  depositors.  But  the  reserves  are 
only  a  fractional  part  (about  50  per  cent.)  of  the 
obligations  of  the  Bank,  and  yet  these  obligations 
are  relied  on  by  other  banks  and  bankers  for  their 
reserves.  So  it  is  always  in  the  power  of  its 
creditors  to  give  it  trouble  by  demanding  payment 
in  gold  of  their  deposits,  and  this  power  is  multi- 
plied because  the  deposits  are  the  reserves  of  other 
banks.  When  that  contingency  arises,  its  only 
means  of  maintaining  its  reserves  is  by  forcing 
payments  from  its  debtors.  This  course  always 
aggravates  a  panic  when  it  has  begun,  and  some- 
times the  first  step  in  a  panic  is  taken  by  the  Bank 
itself. 

ENGLISH   THEORY    OF   RESERVES. 

The  theory  of  the  English  reserve  is  that  it  is 
sufficient  to  meet  any  ordinary  demands,  and  dur- 


18  THE  ENGLISH  SYSTEM 

ing  the  interval  which  it  affords,  time  is  secured  to 
collect  funds  from  maturing  bills  receivable  and 
loans  to  make  good  any  inroads  therein.  The  dif- 
ficulty with  this  theory  is  that  all  the  bank's  obli- 
gations are  on  demand,  while  only  the  reserve  part 
of  its  assets  is  immediately  available.  When  a 
panic  arises,  a  great  deal  more  than  the  reserve  is 
immediately  wanted.  If  there  is  but  the  reserve 
between  the  community  and  a  disastrous  liquida- 
tion, the  state  of  the  reserve  becomes  the  most 
important  factor  in  the  business  situation,  and  a 
continual  source  of  anxiety.  How  to  manage  the 
reserve,  or  how  to  keep  it  up,  becomes  a  question 
of  vital  interest. 


u 
MINIMUM. 


WALTER    BAGEHOT    ON     'THE    APPREHENSION 

5? 


Walter  Bagehot  ably  discusses  the  subject  in 
his  book  on  Lombard  Street,  and  says,  page  322 : 
"  There  is  a  certain  minimum  which  I  will  call  the 
apprehension  minimum,  below  which  the  reserve 
cannot  fall  without  great  risk  of  diffused  fear." 
"  The  Bank  reserve,  then,  ought  never  to  be  reduced 
below  the  apprehension  point.  The  only  practical 
mode  of  obtaining  this  object  is  to  keep  the  actual 
reserve  always  in  advance  of  the  minimum  appre- 
hension reserve."  How,  forsooth,  would  Mr.  Bage- 
hot do  this  ?  He  does  not  describe  the  method, 
but  it  is  evident  that  the  only  way  under  the  Eng- 
lish system  is  by  restricting  discounts,  even  at  the 
risk  of  forcing  a  panic.  The  alternatives  are  to 
suspend  the  system  or  to  adopt  volunteer  methods. 


A   STANDING  MENACE  19 

When  this  dilemma  presents  itself,  the  country  is 
on  the  verge  of  a  panic,  if  not  already  in  one. 

PROFESSOR   BONAMY   PRICE    ON    RAISING   RATE   OF 

DISCOUNT. 

Professor  Bonamy  Price  of  Oxford  can  only  sug- 
gest as  a  means  of  controlling  a  crisis  and  protect- 
ing the  reserve  to  raise  the  rate  of  bank  discount. 
This  must  be  immediately  recognized  as  a  totally 
inadequate  method.  A  financial  panic  is  sudden 
and  acute ;  the  effect  of  raising  the  bank  discount 
rate  would  be  felt  only  gradually. 

THE   EXPANSIVE   METHOD    GIVES   RELIEF. 

MacLeod  presents  the  true  view  in  his  "Theory 
of  Credit,"  when  he  argues  in  favor  of  the  expan- 
sive mode  of  controlling  panics  as  opposed  to  the 
restrictive.  This  is  the  method  advocated  in  the 
Bullion  Report  of  1810,  and  we  shall  see  that  it 
is  the  guiding  principle  of  French  and  German 
finance,  when  those  systems  are  described.  But 
there  must  be  a  legal  power  to  expand  as  a  condi- 
tion precedent,  and  this  the  English  system  lacks. 

The  English  banking  system  is  therefore  a 
standing  menace  to  the  peace  of  the  commercial 
world.  It  has  no  legal  way  of  saving  itself  except 
by  destroying  others,  and  the  volunteer  method  is 
a  very  uncertain  reliance. 

Manifestly  the  reserve  is  entirely  inadequate  for 
the  purpose,  and  some  large  provision,  by  which  at 
least  fifty  or  one  hundred  million  pounds  in  un- 
doubted circulating  notes  could  be  immediately 


20  THE  ENGLISH  SYSTEM 

available,  is  needed  to  insure  the  orderly  working 
of  British  finances  under  any  and  all  circumstances. 

CREDIT  CURRENCY  NEEDED. 

A  simple  and  adequate  relief  could  be  provided 
by  an  act  of  Parliament  giving  to  the  Issue  De- 
partment of  the  Bank  of  England  authority  and 
power  to  issue  to  any  bank  under  government 
supervision  circulating  notes  on  pledge  of  commer- 
cial assets  at  a  safe  percentage  of  their  value.  All 
banks  should  then  be  required  to  receive  these 
notes  at  their  counters  at  par.  If  this  authority 
had  been  in  existence  in  1847,  1857,  and  in  1866, 
there  would  have  been  no  suspensions  of  the  Bank 
charter  in  those  years,  and  in  1890  there  would 
have  been  no  "  begging  of  outside  banks  and  firms 
to  subscribe  to  a  Baring  guarantee  fund,  and  no 
jeering  and  gibing  and  mocking  at  the  Bank  of 
England  for  having  to  be  taken  in  tow  by  the 
Bank  of  France."  (MacLeod.)  The  machinery 
would  have  been  ready  to  meet  even  the  strain  of 
the  Baring  failure,  and  to  liquidate  their  enormous 
indebtedness  without  disturbance  to  the  commercial 
world. 

THE   ENGLISH    BANKING    SYSTEM   NOT   A   GOOD 

MODEL. 

The  English  banking  system,  therefore,  does 
not  present  to  this  country  a  model  worthy  of  imi- 
tation. Its  defects  are  too  apparent.  As  it  stands 
it  is  a  system  of  competitive  banks,  every  one 
of  which  in  a  panic  must  strengthen  itself  from  an 


A  PANIC  21 

insufficient  coin  reserve  at  the  expense  of  the  com- 
munity and  of  the  other  banks.  There  is  no  cen- 
tral power  to  sustain  the  banks  of  England  in  an 
emergency,  and  no  means  of  replenishing  or  pro- 
tecting reserves  except  by  borrowing  in  Continental 
money  centres  or  by  producing  financial  distress  at 
home. 

The  safety  of  the  English  system  lies  in  the 
immense  amount  of  collateral  security  centred  in 
London,  and  in  the  convenient  fact  that  Paris, 
where  it  may  be  used,  is  only  a  few  hours  distant. 

The  answer  to  the  question  why  financial  panics 
take  their  rise  in  England  is  that  English  banks  are 
competitive,  and  English  laws  do  not  provide  any 
way  to  support  and  protect  commerce  and  trade 
from  sudden  failures  of  confidence,  except  by  an 
inadequate  reserve  with  its  apprehension  minimum. 
When  such  a  lack  of  confidence  prevails,  English 
banks,  from  the  Bank  of  England  down,  must 
strengthen  themselves  at  the  expense  of  the  com- 
munity and  each  other.  A  panic  means  an  inter- 
necine struggle  in  which  every  man's  hand  is 
against  his  neighbor,  and  the  signal  which  precipi- 
tates it  is  the  decline  of  the  Bank's  reserve  to  the 
apprehension  minimum.  The  real  question  to  an- 
swer is,  how  panics  could  not  take  their  rise  in 
England  under  such  a  system. 


IV 

THE  FRENCH  SYSTEM 
ITS   TWO    FUNDAMENTAL   THOUGHTS. 

WHEN  in  1848  the  Chamber  of  Deputies  estab- 
lished the  Bank  of  France  in  its  present  form,  they 
"  cut  the  Gordian  knot  without  untying  it."  In 
the  turmoil  of  a  political  revolution  and  a  commer- 
cial crisis  there  was  no  opportunity  for  calm  delib- 
eration over  financial  questions.  Two  considera- 
tions governed.  During  the  discussion  M.  Clapier 
expressed  one  ;  he  said :  "  To  wish  to  constitute  in 
France  a  vast  establishment  of  credit  destined  to 
cover  with  its  branches  the  entire  country  is  a 
thought  which  lacks  neither  eclat  nor  grandeur. 
This  thought  flatters  at  first  sight  the  love  of  cen- 
tralization and  of  unity  whose  influence  dominates 
all  spirits,  and  which  forms  the  distinctive  feature 
of  French  institutions."  The  decree  establishing 
the  Bank  upon  its  present  foundation  expressed  the 
other.  It  reads  :  "  The  essential  interests  of  the 
country  imperiously  demand  that  every  bank  bill 
declared  to  be  legal  money  shall  be  able  to  circu- 
late equally  in  all  parts  of  the  land." 

NOT   A   MONOPOLY. 

The  first  consideration  is  the  glory  of  France, 
and  the  second,  the  commercial  interests  of  that 


PRIVILEGES   OF  THE  BANK  OF  FRANCE    23 

country.  The  Bank  of  France  stands  as  the  em- 
bodiment of  these  two  ideas.  It  has  been  called  a 
monopoly,  as  if  that  was  one  of  its  prominent  fea- 
tures ;  but  it  is  not  a  monopoly  in  the  sense  that  it 
was  originated  for  the  purpose  of  enriching  a  few. 
The  Bank  of  France  has  never  had  that  taint  upon 
it.  It  was  established  as  a  governmental  institu- 
tion, and  as  such  was  given  certain  exclusive  privi- 
leges, but  only  for  the  purpose  of  strengthening 
and  glorifying  France.  All  governments  are  based 
upon  the  reservation  of  exclusive  rights  and  duties, 
and  the  sole  performance  of  special  functions  for 
the  good  of  all. 

PKIVILEGES    AND    REGULATIONS    OF   THE    BANK    OF 

FRANCE. 

The  Bank  of  France  has  always  been  managed 
for  the  public  good,  and  should  no  more  be  consid- 
ered as  a  monopoly  than  are  police  officers  and 
boards  of  health.  The  privileges  granted  to  it 
were  only  a  means  to  the  end,  and  whatever  was 
needed  was  freely  granted  by  the  deputies  in  the 
decree  establishing  the  Bank.  "  This  was,"  said 
M.  Leonce  de  Lavergne,  "  a  revolutionary  act,  ac- 
complished without  examination,  without  discus- 
sion, without  control,  only  by  the  good  pleasure  of 
the  provisional  government."  The  interests  of  the 
departments  were  subordinated  to  the  country, 
and  the  rights  of  the  provincial  banks  were  uncere- 
moniously taken  from  them  and  concentrated  in 
the  Bank  of  France. 

Governmental  supervision  was  established  by  the 


24  THE  FRENCH  SYSTEM 

right  of  the  government  to  appoint  the  governor 
and  deputy  governor  of  the  Bank. 

Solidity  and  credit  were  secured  by  the  large 
capital  of  the  Bank.  Conservative  management 
was  provided  by  strict  rules  limiting  advances  and 
the  use  of  the  funds  of  the  Bank  to  short  three- 
name  paper  or  collateral  security ;  but  the  chief 
and  essential  feature  which  distinguishes  the  Bank 
of  France  among  the  banks  of  the  world  is  the 
privilege  of  issuing  circulating  notes  up  to  a  limit 
which  has  been  gradually  increased  until  it  is  now 
proposed  to  fix  it  at  $1,000,000,000.  All  the  other 
characteristics  of  the  Bank  may  be  paralleled  in 
other  great  national  banks,  but  in  this  one  fact  the 
Bank  of  France  stands  without  a  superior  or  an 
equal.  It  is  therefore  to  this  one  point  that  we 
will  direct  our  inquiries,  and  for  the  further  reason 
that  this  is  the  subject  we  are  at  present  investi- 
gating. 

LARGE   RESERVE   MAINTAINED   WITHOUT   LEGAL 

REQUIREMENT. 

There  are  two  facts  regarding  this  note  issue  to 
be  remarked :  one  is,  the  Bank  is  not  required  by 
law  to  keep  in  its  vaults  any  specified  percentage 
of  reserve  of  coin ;  and  the  other,  that  it  never- 
theless does  maintain  a  coin  reserve  of  about  82 
per  cent,  of  its  note  issues,  or  68  per  cent,  of  its 
total  obligations.  This  enormous  store  of  coin  the 
Bank  is  free  to  use  at  any  time  to  sustain  the 
commerce  of  France,  with  no  restriction  or  regard 
to  any  ratio  of  the  reserve  to  obligations.  The 


PROTECTION  OF  FRENCH  CREDIT        25 

amount  of  this  coin  reserve  is  in  round  numbers 
$600,000,000.  It  is  so  far  in  excess  of  any  ordi- 
nary commercial  demand  for  money  that  rates  of 
discount  vary  only  slightly  from  one  year  to  an- 
other. This  overshadowing  fact  reveals  the  secret 
of  the  stability  of  French  finances. 

SIMPLICITY. 

We  have  here  the  French  system,  which  is  as 
simple  as  one  can  be  made.  Above  all  local,  pri- 
vate, incorporated,  or  branch  banks,  there  is  the 
Bank  of  France,  under  government  supervision, 
with  large  capital,  with  exclusive  right  of  note 
issues,  with  82  per  cent,  of  those  issues  on  hand 
in  coin,  and  yet  with  no  restrictions  to  keep  any 
definite  percentage  of  reserves,  and  therefore  with 
power  to  use  its  coin  at  any  time  to  sustain  the 
commerce  of  France.  It  is  easy  to  see  why  inter- 
est rates  in  France  are  more  uniform  than  else-- 
where,  with  such  a  great  reserve  on  guard  to  aid 
and  protect  legitimate  business.  The  knowledge 
that  $600,000,000  are  available  for  instant  use  is 
sufficient  to  protect  French  commercial  credit  and 
to  sustain  it  under  any  shock,  and  revive  industry 
even  after  prostration  as  complete  as  that  which 
followed  the  war  of  1870. 

A  LARGE  RESERVE  AT  NO  COST  OF  INTEREST. 

The  thriftiness  of  French  banking  is  shown 
in  the  fact  that  the  maintenance  of  this  reserve 
is  at  no  cost  of  interest  to  the  Bank  of  France. 
Its  entire  reserve  is  provided  by  its  note  circula- 


26  THE  FRENCH  SYSTEM 

tion.  By  the  process  of  receiving  gold  on  deposit, 
or  buying  it,  and  when  called  on  for  cash  tender- 
ing in  payment  of  such  demands  silver  or  its  notes, 
it  gradually  has  supplied  all  France  with  the  entire 
circulation  needed  for  home  use,  and  is  itself  the 
custodian  of  an  almost  equal  amount  of  gold  and 
silver  coin. 

BENEFITS    OF   THE   LAKGE   RESERVE. 

The  good  results  of  the  large  reserve  of  the 
Bank  of  France  are  shown  by  its  history.  Since 
1848,  when  it  was  established  with  its  present  priv- 
ileges, French  monetary  affairs  have  moved  on  with 
so  little  disturbance  that  its  financial  history  is  like 
the  uneventful  records  of  a  nation  at  peace.  There 
have  been  commercial  crises  in  France,  such  as  the 
catastrophe  of  the  Panama  Canal  and  the  collapse 
of  the  copper  syndicate  in  1888,  and  political  crises, 
such  as  the  German  war  of  1870  and  the  period 
of  the  payment  of  the  indemnity  in  1871,  but  the 
banking  system  of  France  has  not  been  overthrown 
by  any  of  them,  and  has  earned  its  right  to  the 
admiration  of  the  world  by  its  steadiness  under 
the  severest  strain,  and  by  acting  as  the  most  potent 
agency  in  bringing  about  the  revival  of  the  pro- 
ductive industry  of  France,  after  the  German  war 
of  1870  and  the  restoration  of  specie  payments  in 
1877.  All  these  results  come  not  only  from  its 
large  reserve,  but  from  the  power  to  use  it  at  will 
to  sustain  the  commerce  of  France.  The  power  of 
the  Bank  is  therefore  enormous,  and  far  beyond 
any  demands  except  those  which  might  arise  dur- 
ing war. 


SIMPLICITY  AND  STRENGTH  27 

ARGUMENTS   FOR   DEPARTMENTAL   BANKS. 

It  is  well  to  recall  the  discussion  in  the  Chamber  of 
Deputies  in  1848,  that  we  may  know  that  even  then 
the  local  issue  of  currency  had  its  strong  defenders. 
M.  Clapier  said,  "  From  the  commercial  point  of 
view  the  departments  had  a  just  subject  of  alarm 
when  they  saw  the  fate  of  their  commerce  and 
their  industry  bound  entirely  to  that  of  a  single 
establishment."  M.  Leon  Faucher  said  that  the 
departmental  banks  "  had  the  courage  to  found 
institutions  of  credit  in  cities  when  the  first  efforts 
of  the  Bank  of  France  had  failed.  They  had 
grouped  the  local  resources  and  had  commenced 
to  awaken  the  spirit  of  association  outside  of  the 
capital."  "  The  branches  of  the  Bank  of  France," 
he  said,  "  have  no  roots  in  the  localities  which 
they  serve,  they  are  not  to  the  manner  born  (Us 
ri*y  sont  pas  nes),  they  are  unmistakable  colo- 
nies from  the  metropolis.  They  do  not  use  the 
influence  which  might  bring  them  local  business, 
which  is,  I  think,  one  of  the  principal  causes  of 
their  inferiority."  M.  Faucher  drew  a  conclusion 
in  favor  of  a  system  which  should  make  of  depart- 
mental banks  a  sort  of  confederation.  It  is  in 
this  discussion  that  "  the  last  word  of  the  govern- 
ment on  the  question  of  the  departmental  banks 
must  be  found,"  but  the  debate  ended  by  the 
establishment  of  the  Bank  of  France  in  its  sim- 
plicity and  in  its  strength.  It  was  a  war  measure, 
and,  like  a  fortress,  the  ability  to  withstand  finan- 
cial shocks  was  the  first  requisite. 


28  THE  FRENCH  SYSTEM 

COMPARISON   OF   ENGLISH   AND   FRENCH   SYSTEMS. 
NO   COMPETITION   IN   FRANCE. 

The  first  difference  between  the  English  and 
French  systems  is  shown  by  this  discussion  to  be 
the  competition  between  English  banks  and  the 
entire  absence  of  competition  between  French 
banks.  The  effect  of  a  panic  in  England  is,  as  we 
have  seen,  to  start  a  struggle  between  all  banks, 
institutions,  and  firms  for  gold  and  currency.  A 
money  panic  can  hardly  occur  in  France,  because 
if  a  demand  arises  from  depositors,  the  bank  on 
which  the  run  is  made  would  immediately  apply  to 
the  Bank  of  France  for  a  re-discount,  and  the  run 
would  be  stopped.  French  banks,  therefore,  are 
not  competitive,  because  they  can  get  assistance 
from  a  bank  which  occupies  a  higher  grade  than 
they,  and  application  to  which  is  no  discredit. 

BANK   OF   FRANCE    SUSTAINS    ALL   FRENCH   BANKS. 

In  fact,  as  proof  of  solvency  and  strength,  a  local 
French  bank  will  advertise  its  condition,  showing 
that  it  has  10  per  cent,  of  its  liabilities  on  hand  in 
cash,  10  per  cent,  in  call  loans,  and  50  per  cent,  in 
"bills  receivable  immediately  discountable  at  the 
Bank  of  France."  Such  a  position  is  impregnable. 
Thus  the  strength  and  credit  of  the  Bank  of 
France  are  imparted  to  all  the  banks  of  the  na- 
tion. 


RELATIONS   TO   THE  RESERVE  29 

A    GRADED    SYSTEM    ABOLISHES    COMPETITION   AND 

PANIC. 

There  can  be  no  competition  between  banks 
which  are  graded.  The  Bank  of  England  lacks 
the  essential  requisite  to  enable  it  to  be  at  the 
head  of  English  banks,  that  is,  it  has  no  power  to 
render  assistance  in  time  of  need  by  the  issue  of 
credit  currency,  but  must  either  go  to  the  Bank  of 
France  or  to  other  money  lenders  for  help,  or  sus- 
pend its  charter.  It  must  enter  into  competition 
for  gold  with  all  the  other  banks  of  England,  with 
which,  in  that  particular,  it  is  on  a  level. 

So  the  chief  characteristic  of  the  French  system 
is  that  it  is  graded.  The  Bank  of  France  com- 
pletes the  system,  because  it  is  of  a  grade  higher 
than  all  other  French  banks.  It  not  only  has 
greater  capital  and  is  under  government  supervi- 
sion, but  it  has  superior  powers  not  enjoyed  by  the 
lower.  Owing  to  its  higher  position  and  powers  it 
can  be  appealed  to  for  aid,  and  its  large  reserve 
enables  it  to  grant  assistance  wherever  needed. 

The  lesson  we  can  learn  from  French  finance  is 
the  benefit  of  a  large  available  reserve. 

AVAILABLE    RESERVE    VS.    THE    CURRENCY   PRIN- 
CIPLE. 

The  English  and  French  systems  differ,  sec- 
ondly, in  the  relations  of  their  banks  to  the  reserve. 
The  Bank  of  France  is  entirely  free  from  any  re- 
striction in  its  management  of  its  reserve  or  of  its 
note  issues.  The  Bank  of  England  is  compelled 


30  THE  FRENCH  SYSTEM 

to  cancel  its  notes  as  its  coin  reserves  decline.  The 
French  method  holds  its  entire  mass  of  coin  ready 
to  sustain  the  commercial  community  in  time  of 
panic  ;  the  English  method  creates  panic,  aggra- 
vates it,  and  sacrifices  its  business  community  on 
the  mistaken  theory,  which  is  the  foundation  of 
Peel's  bill,  called  the  "  currency  principle,"  that 
"  when  bank  notes  are  permitted  to  be  issued  they 
should  exactly  equal  the  gold  they  are  alleged  to  dis- 
place, and  that  for  every  five  sovereigns  drawn  out 
of  the  bank,  a  five-pound  note  should  be  withdrawn 
from  circulation."  1  The  frequent  break-downs  of 
the  English  system  and  the  stability  of  the  Erench 
system  under  severe  strain  prove  conclusively  two 
points ;  first,  that  the  so-called  currency  principle 
produces  panic,  and  second,  that  the  opposite  prin- 
ciple of  an  available  reserve  produces  stability.  The 
"  currency  principle,"  with  competitive  banks,  is  the 
English ;  the  available  reserve,  with  graded  banks, 
is  the  French.  Looking  over  the  ramparts  of 
their  enormous  reserve,  the  Frenchmen  were  right 
in  saying  :  "C'est  <$* Angleterre  et  des  Etats-Unis, 
ou  existe  la  pluralite  des  banques,  que  viennent  les 
commencements  de  crise." 

1  MacLeod,  Theory  of  Credit,  p.  687. 


V 

THE  GERMAN  SYSTEM 
UNLIMITED   POWER   OF   ISSUE. 

"  THE  distinguishing  novelty  of  the  German 
law,"  says  Professor  Dunbar,  "  is  the  power  given 
to  increase  the  uncovered  issue  beyond  the  limit 
(of  385,000,000  marks)  subject  to  payment  of 
the  tax  of  five  per  cent.,  in  order  to  secure  a  cer- 
tain degree  of  elasticity  at  the  point  where,  under 
the  English  law,  the  rigidity  of  the  line  drawn  by 
Peel's  act  has  sometimes  presented  a  frightful  di- 
lemma. This  elastic  limit  has  several  times  taken 
effect  in  the  case  of  the  smaller  banks  and  also 
in  the  case  of  the  Reichsbank  in  December,  1881, 
in  September  and  October,  1882,  in  December, 
1884,  in  January,  1885,  in  December,  1886,  and 
three  times  in  the  latter  part  of  1889,  the  issues  of 
the  bank  being:  in  some  of  these  cases  to  a  consid- 

o 

erable  amount  beyond  the  fixed  limit.  On  more 
than  one  occasion  it  seems  certain  that  the  opera- 
tion of  the  elastic  provision  was  successful  in  sav- 
ing the  German  community  from  what  would  have 
been  a  severe  spasm  of  contraction  under  the  usual 
administration  of  Peel's  act.' 


32  THE  GERMAN  SYSTEM 

OTHER   PROVISIONS. 

The  German  system  was  formed  in  1875,  and  is 
consequently  the  most  recent  of  the  great  banking 
systems  of  the  world,  and  coming  into  existence 
with  the  establishment  of  the  empire,  an  opportu- 
nity was  given  to  use  the  world's  experience  un- 
trammeled  by  customs  and  precedents.  "  In  a  part 
of  this  system  are  easily  traceable  the  general  out- 
line of  the  English  Bank  Charter  Act  of  1844," 
says  Professor  Dunbar.  Charles  A.  Conant  writes : 
"  Those  banks  which  were  not  disposed  to  accept 
the  new  conditions  were  dealt  with  in  a  manner 
similar  to  the  French  departmental  banks  after  the 
revolution  of  1848."  The  connection  of  the  gov- 
ernment with  the  Imperial  Bank  of  Germany  is 
similar  in  many  respects  to  the  model  of  the  Bank 
of  France.  A  general  circulation  of  notes  was  pro- 
vided after  the  means  used  in  Scotland,  Prussia, 
and  Switzerland,  by  obliging  the  different  banks  to 
mutually  exchange  their  bills,  a  provision  which 
existed  in  the  State  Bank  of  Indiana  and  in  other 
state  systems  in  the  United  States. 

SPECIAL   POWERS    CONFERRED  ON   A   FEW   BANKS. 

All  these  provisions  present  no  new  features,  but 
in  the  power  given  to  the  Imperial  Bank  and  the 
six  other  banks  of  issue  to  increase  their  note  issues 
ad  libitum  a  radical  departure  was  made  from  all 
established  precedents.  This  "  novelty,"  as  it  is 
called,  is  the  provision  which  relates  to  the  subject 
we  are  investigating,  and  we  can  therefore  confine 
our  attention  exclusively  to  that. 


UNLIMITED  ISSUE  33 

TWO   ADVANTAGES  —  PROTECTION   TO    BANKS,  SUP- 
PORT   OF    COMMERCIAL    CREDIT. 

The  legal  privilege  granted  to  the  Imperial  Bank 
and  to  a  few  other  banks  which  form  a  grade  higher 
than  popular  banks  of  issuing  their  notes  without 
limit,  should  be  considered  in  two  aspects.  First, 
as  a  reserve  power  to  protect  the  banks  of  issue 
against  sudden  demands ;  second,  as  a  means  of 
sustaining  the  credit  and  facilitating  the  business 
of  the  commercial  community  of  Germany. 

PROTECTION   TO    BANKS. 

The  law  of  1875,  establishing  the  German  sys- 
tem, says  in  effect  that  the  ordinary  rule  shall  be 
that  the  banks  of  issue  shall  hold  in  cash  a  reserve 
of  33^  per  cent,  of  their  total  circulation,  but  as 
extraordinary  demands  are  likely  to  occur,  the 
banks  of  issue  may  put  out  additional  notes  with- 
out limit,  but  on  such  excess  of  uncovered  notes 
a  tax  of  5  per  cent,  per  annum  shall  be  imposed. 
The  theory  is  that  such  excess  of  issues  is  objec- 
tionable and  might  be  a  source  of  danger  to  the 
banks ;  and  therefore  a  tax  should  be  imposed 
thereon  sufficiently  heavy  to  prevent  their  issue, 
unless  the  demand  for  money  were  acute.  But  as 
a  perfect  system  must  contain  within  itself  the 
means  of  self-defense,  the  objections  to  an  unlim- 
ited issue  are  overbalanced  by  the  necessity  of  self- 
preservation. 

The  provision  for  unlimited  issues  is  conferred 
only  on  the  Imperial  Bank  and  six  others.  It 


34  THE  GERMAN  SYSTEM 

would  evidently  enable  them  to  liquidate  all  their 
demand  obligations  if  pushed  to  an  extreme.  It 
is  a  perfect  protection  against  runs  or  panics,  and 
the  result  is  that  monetary  panics  do  not  take  their 
rise  in  Germany.  Imagine  the  German  banks 
operated  on  the  principle  prevailing  in  England 
and  the  United  States,  and  dependent  only  on 
their  gold  reserve  of  33^  per  cent.,  and  it  can  be 
asserted  without  fear  of  contradiction  that  panics 
would  occur  under  such  circumstances.  This  pro- 
vision, then,  acts  the  same  as  a  reserve  in  cash  of 
100  per  cent,  of  liabilities.  It  is  merely  a  legal 
reserve  power  and  costs  nothing  to  maintain. 

THE    RESERVE    POWER    OF    THE    HIGHER    GRADE  OF 
BANKS    PREVENTS    PANICS. 

The  solidity  of  the  German  system,  without  a 
monetary  panic  for  over  twenty  years,  proves  to  us 
that  a  reserve  need  not  be  in  the  shape  of  gold  and 
silver,  as  in  the  case  of  the  Bank  of  France,  but 
that  it  is  equally  serviceable  and  effective  if  it  is  in 
bank  assets  against  which  the  law  permits  an  issue 
of  notes :  also  that  the  reserve  need  not  be  held  by 
one  bank,  but  may  be  distributed  among  several. 
It  is  a  reserve  power  rather  than  an  actual  reserve. 
The  two  systems  of  France  and  Germany  agree  in 
this,  that  they  each  provide  a  large  fund  which  is 
available  to  the  banks  of  those  countries  to  meet 
any  sudden  demand.  In  France  the  fund  is  in  the 
gold  and  silver  held  by  the  Bank  of  France,  which 
it  has  obtained  bv  the  issue  of  its  notes.  In  Ger- 

•/ 

many  the  fund  is  in  the  assets  of  the  Imperial  Bank 


PROFESSOR   DUNBARS   OPINION  35 

and  a  few  other  large  banks  against  which  they  are 
authorized  to  issue  their  notes.  The  banks  of  lower 
grade  of  both  countries  are  thus  protected  by  a 
fund  provided  by  law  to  carry  them  over  any  mone- 
tary panic ;  consequently  in  neither  country  do 
they  have  monetary  panics,  and  this  is  only  due  to 
the  legal  provision  of  a  large  available  reserve. 

ALL  NOTES  MUST  BE  EECEIVED  AT  PAR  BY 
EVERY  BANK  OF  ISSUE. 

There  are  but  few  banks  of  issue  in  Germany, 
and  it  is  therefore  possible  to  require  "  every  bank 
of  issue  to  receive  at  par  the  notes  of  every  other 
bank."  This  places  where  it  rightfully  belongs 
the  guarantee  of  the  goodness  of  the  circulating 
medium,  that  is,  on  the  concerns  which  derive  a 
profit  therefrom. 

"  The  credit  of  the  notes  is  maintained,"  says 
Professor  Dunbar,  "  by  their  strict  convertibility 
and  by  the  law  which  makes  them  everywhere  cur- 
rent in  payments  to  any  bank  of  issue."  These 
facts  prove  to  us  from  the  German  system  what  has 
already  been  deduced  from  the  French,  that  it  is 
the  available  reserve  which  produces  stability,  and 
it  matters  not  in  what  form  it  is  provided,  whether 
it  is  lodged  in  a  single  bank  or  is  a  power  conferred 
upon  many,  but  in  either  case  the  banks  of  issue 
must  be  of  a  higher  grade  than  the  popular  banks. 

We   have  thus  considered  the  first  of  the  two 

aspects  of  this  legal  reserve  power. 

- 


36  THE  GERMAN  SYSTEM 

SUPPORT    OF    COMMERCIAL   CREDIT. 

The  second  is  its  relation  to  sustaining  and  pro- 
tecting the  credit  and  commerce  of  Germany.  The 
few  banks  of  issue  in  Germany  constitute  a  class 
or  grade  higher  than  the  many  credit  institutions 
which  are  nearer  the  people.  The  great  Impe- 
rial Bank  has  its  276  or  more  branches.  There 
are  many  banking  institutions  and  popular  coop- 
erative banks  also.  The  members  of  the  last- 
named  class  number  over  half  a  million  persons. 
They  form,  says  Professor  Jannet,  "  a  hierarchy 
of  banks,  which  by  the  successive  re-discount  of 
their  paper  cause  the  bills  of  exchange  of  the  most 
modest  artisans  to  reach  the  Imperial  Bank." 
The  German  system,  like  the  French,  therefore, 
provides  a  system  of  graded  banks,  and  at  the  head 
are  the  banks  which  have  the  power  of  unlimited 
issue.  These  are  under  government  supervision 
and  have  the  confidence  of  the  people  equally  with 
the  government.  In  a  graded  system  there  can  be 
no  competition  for  coin  between  banks  of  the  lower 
or  popular  grade,  and  there  is  no  competition  in 
Germany.  If  an  emergency  arises,  relief  can  be 
obtained  through  discounts  which  find  their  way 
up  from  the  lower  to  the  higher  banks.  No  use 
of  money  is  safer  than  re-discounting  discounted 
bills,  with  the  addition  to  the  original  security  of 
the  name  of  the  lower  bank  as  an  additional  in- 
dorser.  Commercial  credit  is  sustained  and  pro- 
tected by  a  system  which  thus  provides  an  infallible 


STABILITY  BY  LAW  37 

way  of  obtaining  discounts  in  time  of  need.  The 
German  system  is  not  so  strong  as  the  French, 
but  its  differences  illustrate  the  mechanism  of  a 
reserve,  and  show  us  that  stability  is  only  a  matter 
of  legal  enactment. 


VI 

THE  UNITED  STATES  SYSTEM 
A   COMPETITIVE  SYSTEM   LIKE   THAT   OF   ENGLAND. 

AN  examination  of  the  banking  system  of  the 
United  States  shows  that  in  essential  particulars 
it  is  similar  to  that  of  England.  Its  distinguish- 
ing: characteristic  is  that  our  federal  and  state  laws 

o 

provide  for  a  multiplicity  of  individual  competi- 
tive banks,  with  a  reserve  provided  out  of  the  cash 
resources  of  the  bank  as  a  protection  against  in- 
solvency and  panic.  No  power  of  note  issue  is 
given  except  on  security  of  government  bonds. 
The  legal  method  of  protecting  reserves  is  the  re- 
strictive, that  is,  enforcing  liquidations  of  bank 
assets.  These  characteristics  make  our  system 
like  the  English,  and  for  these  reasons  panics 
of  the  same  kind  prevail  in  both  countries.  All 
the  defects  of  the  English  system  are  therefore 
experienced  in  the  United  States.  When  the 
reserves  of  our  banks  are  encroached  upon  by 
demands  from  depositors,  so  that  they  are  brought 
near  the  apprehension  minimum,  or  more  often 
when  it  is  thought  necessary  by  bank  officials  to 
make  provision  for  anticipated  demands,  it  becomes 
the  duty  of  the  banks,  and  it  is  their  only  legal 
mode  of  relief,  to  demand  payment  of  loans  and 


PERPETUAL   SOLICITUDE  39 

discounts  irrespective  of  the  effect  on  borrowers 
or  on  market  prices.  This  is  also  the  English 
method. 

THE   APPREHENSION    MINIMUM   PRODUCES    CON- 
STANT   ANXIETY. 

The  apprehension  that  such  liquidation  may  be 
demanded  at  any  time  produces  a  constant  state 
of  anxiety  in  the  business  community.  The  with- 
drawal of  bank  accommodation  from  merchants  and 
others  in  a  spasmodic  way  without  reason,  except 
that  the  banks  have  no  other  recourse,  paralyzes 
business,  retards  the  development  of  the  country, 
and  produces  hard  times.  No  calculations  as  to 
the  money  market  are  possible,  and  the  chance  of 
a  panic  must  always  be  taken  into  consideration 
by  business  men.  Rates  of  interest  cannot  be  uni- 
form, and  the  spasms  of  liquidation  cause  not  in- 
frequently extravagant  charges  for  money. 

The  maintenance  of  the  reserve  becomes  there- 
fore a  subject  of  perpetual  solicitude  to  bank  man- 
agers, and  when  the  reserve  declines  at  the  great 
money  centres  all  the  business  community  is  dis- 
turbed, for  it  is  well  understood  that  the  banks  are 
unable  to  conform  to  the  requirements  of  the  law, 
except  by  compelling  sacrifices  by  the  borrowing 
public.  This  being  the  only  recourse  of  the  banks, 
the  condition  of  bank  reserves  is  the  one  impor- 
tant question  in  United  States  finance. 


40  THE   UNITED  STATES  SYSTEM 

APPREHENSION   JUSTIFIED    BY    SMALLNESS    OF 

RESERVES. 

That  this  state  of  apprehension  is  well  founded, 
and  that  these  disturbances  are  not  without  cause, 
is  proved  by  the  small  percentage  of  reserve  to 
liability  held  by  the  banking  institutions  of  the 
United  States. 

From  the  statistics  contained  in  the  Report  of 
the  Comptroller  of  the  Currency  of  December  17, 
1896,  it  appears  that  on  October  6,  1896,  the 
average  cash  reserves  of  the  different  classes  of 
banks  in  the  United  States  were  the  following 
percentages  of  their  demand  obligations  :  — 

Deposits.  Cash  Reserve.  Per  cent. 

3676  National  Banks    .     .     .     $1,798,756.734  $343,143,362  19.07 

3708  State  Banks     ....           695,659,914  101,038,641  14.52 

824  Private  Banks      .     .     .             59,116,378  6,157,561  10.41 

8208  Commercial  Banks   .     .       2,553,533,026  450,339,564  17.63 

260  Loan  and  Trust  Go's.    .          586,468,156  26,800,871  4.56 

988  Savings  Banks      .     .     .       1,935,466,468  35,201,528  1.82 


9456  All  banks 5,075,467,650  512,341,963  10.09 

The  smallness  of  the  cash  reserves  carried  by 
loan  and  trust  companies  and  savings  banks,  about 
four  and  a  half  per  cent,  and  two  per  cent,  of  their 
deposits  respectively,  is  due  to  the  protection  given 
by  the  time  limit.  Loan  and  trust  companies 
practically  do  not  take  advantage  of  this  privilege, 
but  excluding  them  from  the  calculation  it  appears 
that  the  average  cash  reserve  of  the  commercial 
banks,  that  is,  national,  state,  and  private,  com- 
pared with  their  demand  obligations,  is  17.63  per 
cent.  If  the  loan  and  trust  companies  are  in- 


CALAMITOUS  EFFECTS  41 

eluded,  the  percentage  would  be  15.20,  and  if  the 
savings  banks,  10.09.  The  business  of  the  country 
is  done  ultimately  by  commercial  banks,  that  is, 
national,  state,  and  private,  and  not  only  does 
trade  and  commerce  depend  upon  them,  but  in  a 
large  degree  the  loan  and  trust  companies  and 
savings  banks  also.  The  commercial  banks  guard 
the  solvency  and  stability  of  our  finances,  and  con- 
sequently the  ratio  of  their  cash  reserves  to  their 
demand  obligations,  and  the  means  by  which  they 
can  protect  themselves,  become  matters  of  the  first 
consequence  to  the  welfare  of  our  country. 

IS    17.63    PER    CENT.    A    SAFE   RESERVE? 

The  question  then  is,  Is  17.63  per  cent,  a  safe 
ratio  for  a  cash  reserve  ?  The  subject  of  the  avail- 
ability of  deposit  reserves  and  a  recourse  to  loans, 
discounts,  and  securities  is  discussed  in  a  subsequent 
chapter.  Experience  shows  that  this  amount  of 
cash  reserve  in  lawful  money,  that  is,  17.63  per 
cent.,  is  too  small  to  insure  stability  in  our  finances, 
and  the  efforts  of  the  banks  to  maintain  their  re- 
serves are  attended  with  disastrous  results.  In 
1893  loans  were  curtailed  by  the  national  banks 
alone  to  the  extent  of  1370,000,000,  producing 
calamitous  effects  from  which  the  country  has  not 
yet  recovered.  This  great  sacrifice  was  occasioned 
because  the  banks  were  compelled  to  pay  depositors 
1298,000,000,  and  they  had  no  other  way  to  raise 
the  money  except  by  producing  a  panic  and  almost 
ruining  the  country. 


42  THE   UNITED  STATES  SYSTEM 

DO    BANKS    BEGIN    PANICS  ? 

In  all  panics  it  is  a  question  who  become  fright- 
ened first,  the  banks  or  the  public.  There  are 
some  shrewd  observers,  authorities  on  both  English 
and  American  finance,  who  think  that  the  first  step 
in  every  panic  is  taken  by  the  banks,  who  are  watch- 
ing financial  events  more  closely  and  are  more 
ready  to  take  alarm  than  the  commercial  public. 
But  when  once  the  fight  is  begun,  it  must  go  on  to 
a  finish. 

THE  ISSUE  OF  CLEAEING  HOUSE  CEKTIFICATES 
COMPARED  TO  SUSPENSION  AND  VOLUNTEER 
METHODS. 

The  desperate  remedy  of  the  issue  of  clearing 
house  certificates  is  an  expedient  parallel  to  the 
suspension  of  the  charter  of  the  Bank  of  England, 
or  the  resort  to  volunteer  methods.  The  issue  of 
clearing  house  certificates  is  a  confession  of  the 
lack  in  our  banking  system  of  any  provision  by 
which  a  collapse  of  credit  may  be  avoided.  It  is 
an  acknowledgment  that  the  reserve  provided  by 
law  is  insufficient  to  ward  off  disaster,  or  that 
liquidation  can  be  pressed  any  further  without 
utter  ruin  to  tlxe  business  community.  It  is  a  sus- 
pension of  the  operation  of  the  provisions  of  the 
National  Banking  Act  as  regards  reserves,  and  it 
is  a  resort  to  a  voluntary  combination  among  the 
members  of  clearing  houses  not  contemplated  in 
the  law.  By  it  the  banks  agree  to  pay  out  their 
cash  reserves  and  hold  in  their  place  clearing 


WINKING  AT  LAW  BREAKING  43 

house  certificates  secured  by  pledge  of  convertible 
collateral. 

SUSPENSION    OF   NATIONAL    BANKING   ACT. 

The  adoption  of  this  measure  is  justified  by  the 
gravity  of  the  situation,  and  by  its  successful  oper- 
ation. It  means  that  the  already  small  reserves  of 
the  banks  have  been  reduced  to  the  danger  point, 
and  the  requirement  of  the  National  Banking  Act 
for  their  maintenance  at  the  legal  limit  must  be 
openly  and  boldly  disregarded.  The  Comptroller 
of  the  Currency  can  easily  be  induced  to  wink  at 
this  infraction  of  the  law,  and  the  whole  country 
can  be  asked  to  submit  to  the  inconvenience  of  a 
restriction  in  cash  payments.  When  any  holder 
of  a  demand  obligation  of  a  bank  calls  for  lawful 
money,  he  can  be  taken  into  the  cashier's  room  and 
be  subjected  to  an  inquisition  as  to  what  he  wants 
it  for,  and  if  possible  argued  out  of  his  request. 
This  state  of  affairs  is  equivalent  to  a  suspension 
of  the  charter  of  the  Bank  of  England  with  a  pro- 
mise of  an  act  of  indemnity,  and,  like  suspension, 
it  is  remedial  and  not  preventive.  It  comes  after 
a  panic,  and  not  before.  It  means  that  the  appre- 
hension minimum  has  been  passed,  and  that  any 
remedy,  however  desperate,  is  to  be  preferred  to  a 
continuation  of  enforced  liquidations. 

MONETARY   CRISIS    PRODUCED    BY    SMALL    LOSS    OF 

RESERVES. 

From  the  low  state  of  the  reserves  it  is  evident 
that  a  slight  loss  of  cash,  even  as  small  as  five  per 


44  THE   UNITED  STATES  SYSTEM 

cent,  of  deposit  liabilities,  is  sufficient  to  produce  a 
monetary  crisis.  This  is  a  very  weak  condition. 
The  fact  that  all  the  assets  of  the  national  and 
other  banks  are  sound  does  not  give  relief  when 
there  is  no  money  to  be  had  except  at  a  sacrifice. 
Our  condition  is  similar  to  that  of  English  banks, 
but  it  is  more  precarious  because  our  money  centres 
are  far  removed  one  from  the  other,  and  foreign 
money  markets  are  still  more  distant. 

ADDITIONAL    PKOVISIONS  NEEDED   TO  INSURE 

STABILITY. 

Reserves  of  17.63  per  cent,  are  not  sufficient  to 
produce  stability  in  our  country's  finances,  and  we 
require  some  provision  by  which,  in  case  of  need, 
our  banks  can  have  an  amount  of  undoubted  cir- 
culating notes  to  meet  a  drain  like  that  of  1893 
without  prostrating  the  country.  This  would  place 
us  on  a  footing  of  stability  equal  to  that  of  the 
French  and  German  nations,  and  give  us  the  needed 
protection  against  the  frequent  contractive  spasms 
of  the  money  market  which  have  wrought  such 
evil  in  our  country  of  late  years.  The  difficulty  is 
only  with  our  banking  laws,  and  can  be  as  readily 
cured  in  our  country  as  it  has  been  in  France  and 
Germany. 

If  17.63  per  cent,  is  too  small  a  reserve  for  com- 
petitive banks  to  carry,  then  some  means  must  be 
found  to  increase  the  available  cash.  But  it  must 
be  recognized  that  the  reserve  may  not  be  wanted, 
therefore  it  should  not  be  provided  by  capital  with- 
drawn from  productive  use.  It  will  cost  nothing 


THE  FEELING   OF  SECURITY  COSTS      45 

and  will  be  just  as  serviceable  if  it  is  provided  by 
law  as  a  power  which  may  be  used  in  case  of  need. 
A  bank  will  keep  a  minimum  reserve  if  it  is  to  be 
provided  out  of  capital  which  should  be  earning 
interest,  or  out  of  deposits  on  which  interest  is  paid. 
But  a  bank  will  keep  a  maximum  reserve  if  it  is 
provided  at  no  loss  to  the  bank.  If  the  feeling  of 
security  costs,  the  banker  will  buy  it  at  as  low  a 
price  as  possible.  If  it  is  to  be  had  for  nothing, 
he  will  carry  all  of  it  that  he  can. 

CURRENCY     MUST    HAVE    UNIVERSAL    CREDIT    AND 

CONVERTIBILITY. 

But  no  currency  should  be  authorized  which  the 
banks  themselves  will  not  take  at  par.  If  so,  the 
currency  must  be  secured  and  its  prompt  payment 
guaranteed  in  a  way  that  will  make  it  absolutely 
safe  to  any  holder.  This  can  be  done  by  creating 
a  grade  of  banks  higher  than  our  ordinary  com- 
mercial banks  to  act  as  trustees  for  the  public. 
This  grade  can  be  made  out  of  our  clearing  houses, 
which  already  perform  valuable  functions  in  our 
banking  system.  If  organized  under  federal  law, 
they  can  act  for  our  banks  in  the  same  way  that  the 
Bank  of  France  and  the  German  banks  of  issue 
act  for  popular  French  and  German  banks.  By 
this  means  our  banks  would  be  supplied  with  a 
reserve  equal  to  the  par  of  their  capital,  or  six 
hundred  millions  of  dollars,  which  would  be  suffi- 
cient to  support  and  protect  commercial  credit  in 
the  United  States  in  any  monetary  panic,  and 
would  probably  prevent  all  panics  in  the  future. 


46  THE   UNITED  STATES  SYSTEM 

FEATURES    OF  A  LAW  TO   INCORPORATE  CLEARING 

HOUSES. 

The  law  incorporating  clearing  bouses  should 
give  to  one  of  the  number  in  each  State  power  to 
receive  convertible  assets  from  banks  in  that  State, 
and  issue  to  them  circulating  notes  thereon  at  75 
per  cent,  of  their  value,  to  an  amount  not  in  excess 
of  their  capital,  these  notes  to  be  guaranteed  first 
by  the  bank  to  whom  they  are  issued,  then  by  the 
associated  banks  in  the  clearing  houses  of  its  State, 
and  finally  by  all  clearing  houses,  and  these  notes 
to  be  received  at  par  through  any  clearing  house  in 
the  United  States. 

This  will  give  a  currency  locally  issued  of  un- 
doubted soundness,  which  will  circulate  at  par  over 
the  entire  country.  It  will  avoid  banking  mono- 
poly, and  issues  by  numerous  banks  dependent  for 
credit  on  the  solvency  of  each,  but  chiefly  it  will 
give  to  our  commerce  and  trade  that  protection 
and  stability  which  come  from  a  graded  system  of 
banks  and  an  ample  available  bank  reserve.  Let 
our  lawgivers  provide  the  banks  with  a  reserve 
which  shall  cost  them  nothing,  and  make  it  as  large 
as  prudent,  so  that  it  may  be  said  of  our  land  that 
failures  are  reduced  to  a  minimum,  and  panics  do 
not  arise  here. 

PREVAILING   DEPRESSION   DEMANDS    RELIEF. 

Our  country  has,  during  the  past  few  years, 
passed  through  an  ordeal  which  may  almost  be 
compared  to  the  effect  on  France  of  the  German 


INTERESTS   OF  BORROWERS  47 

war  of  1870.  The  liquidation  which  has  been 
forced  upon  our  country  has  ruined  much  pro- 
ductive business ;  our  manufactories  have  been 
prostrated ;  our  banks  have  suffered,  especially 
those  in  the  outlying  districts  where  their  assist- 
ance is  most  needed ;  markets  for  the  products  of 
the  farm  have  been  taken  away ;  merchants  have 
seen  their  profits  dwindle  and  disappear ;  laborers 
have  gone  back  to  other  countries  because  they 
could  not  find  work  here  ;  the  poor  have  complained 
of  hard  times  ;  and  the  development  of  our  country 
has  been  greatly  retarded  and  in  some  respects 
brought  to  a  standstill. 

All  banking  should  be  subservient  to  the  inter- 
ests of  the  borrowers.  They  are  the  bread-winners 
on  whom  the  prosperity  of  the  land  depends. 
Their  capital  in  business  is  many  times  that  of 
all  the  capital  of  all  the  banks. 

We  now  need,  if  ever  in  our  history,  such  a 
service  as  was  rendered  by  the  Bank  of  France  to 
the  French  nation  after  the  prostration  of  the 
German  war  of  1870.  The  Bank  then  used  its 
great  power  to  set  in  motion  the  wheels  of  indus- 
try, and  it  was  this  agency  more  than  any  other 
single  cause  which  restored  prosperity  to  France. 
In  the  same  way  our  country  now  should  have  the 
support  of  a  perfected  banking  system  that  will 
not  turn  around  and  destroy  the  commerce  which 
it  has  brought  into  being  because  the  law  provides 
no  other  way  by  which  the  banks  can  protect 
themselves. 

Is  it  not  time  to  abandon  the  competitive  system, 


48  THE   UNITED  STATES  SYSTEM 

with  its  disasters  and  confusion,  and  adopt  a  graded 
one,  with  its  order  and  stability? 

The  change  from  a  competitive  to  a  graded 
system  of  banking  is  a  radical  one.  Yet  it  would 
not  be  noticeable  to  the  public  because  it  requires 
no  change  in  our  existing  banks  or  banking- 
methods  which  other  proposed  plans  necessitate. 
The  National  Banking  Act,  with  which  we  are  so 
familiar,  would  stand  without  amendment.  The 
public  would  only  be  concerned  to  know  that 
monetary  panics  are  a  thing  of  the  past.  The 
new  legislation  would  have  reference  only  to  the 
incorporation  of  clearing  houses.  The  change  in- 
volves no  experiment,  because  a  graded  system 
has  been  in  successful  operation  for  many  years  in 
some  of  the  old  state  banking  systems  of  this 
country,  and  in  large  nations  of  Europe.  The 
details  are  so  simple  that  all  banks  could  under- 
stand and  carry  them  into  effect  without  difficulty. 
The  protecting  structure  would  rise  noiselessly  over 
the  heads  of  the  people  without  the  sound  of  axe 
or  hammer. 


VII 

A  DISCUSSION  OF  THE  CONDITION  OF  BANKING 
RESERVES  IN  THE  UNITED  STATES  AS  THE 
CAUSE  OF  OUR  FINANCIAL  TROUBLES 

A  SPECIFIC  location  of  the  difficulty  with  the 
banking  system  of  the  United  States  is  needed, 
like  a  diagnosis  of  a  disease,  so  that  we  may  know 
whether  or  not  a  plan  proposed  as  a  remedy,  what- 
ever it  may  be,  will  go  to  the  affected  spot  and  give 
the  desired  relief.  The  difficulty  may  be  located 
by  the  aid  of  statistics. 

Our  inquiry  must  first  be  directed  to  the  condi- 
tion of  the  banking  reserves.  It  is  on  the  condi- 
tion of  the  reserves  that  the  health  of  the  body 
financial  depends.  The  central  principle  of  the 
credit  system  is  the  maintenance  of  obligations  at 
par  by  means  of  a  cash  reserve. 

A  statement  of  the  reserves  of  all  the  banking 
institutions  of  the  country  making  reports  to  the 
Comptroller  of  the  Currency  is  given  on  page  40. 
The  following  discussion  has  reference  only  to 
national  banks,  for  the  reason  that  the  statistics 
regarding  them  are  given  with  the  greatest  full- 
ness by  the  Comptroller,  while  statistics  relating  to 
state  and  private  banks,  loan  and  trust  companies 
and  savings  banks,  are  too  fragmentary  to  admit  of 
satisfactory  examination  or  accurate  deductions. 


50      CONDITION  OF  BANKING  RESERVES 

In  addition,  it  is  to  be  remarked  that  national 
banks  make  a  stronger  showing  than  state  and 
other  banks,  and  if  there  is  any  weakness  in  the 
situation  of  national  banks  it  is  indicative  of  still 
greater  weakness  on  the  part  of  the  rest  of  our 
financial  institutions.  No  charge  of  unfairness 
can  be  made  to  the  figures  presented,  for  they  give 
a  view,  the  most  favorable  possible  that  can  be 
taken  of  any  class  of  banks  in  the  United  States. 

Banking  reserves  under  our  national  banking 
law  are  divided  into  two  classes,  reserves  in  lawful 
money  and  deposit  reserves.  Let  us  consider 
first - 

RESERVES    IN    LAWFUL   MONEY. 

The  figures  in  the  following  table  are  taken 
from  the  last  report  of  the  Comptroller  of  the 
Currency  to  Congress,  in  which  national  banks  are 
divided  into  three  classes,  country  banks,  and  banks 
in  reserve  cities  of  the  first  and  second  class.1 

1  A  division  of  States  into  two  classes,  '  Bryan '  and  '  McKin- 
ley,'  has  been  adopted  in  speeches  on  the  currency  question  before 
Congress.  To  some  extent  that  division  has  been  followed  here, 
because  the  classification  is  not  only  political  but  geographical 
and  historical,  and  divides  the  States  in  some  degree  according 
to  accumulated  wealth.  The  figures  given  in  the  report  of  the 
Comptroller,  and  in  other  public  documents,  have  been  used  with- 
out any  particular  attempt  to  verify  or  correct  them.  The  statis- 
tics are  sufficiently  accurate  to  establish  the  conclusions  stated. 


RESERVES  OF  NATIONAL  BANKS 


51 


TABLE  I. 

Reserves  of  National  Banks  in  lawful  money,  showing  percentages  thereof  to  depos- 
its^ and  surplus  percentages  above  requirements,  October  6,  1896. 


STATES. 

Division  in  He- 
port  of  Comp- 
troller. 

Number  of  banks. 

Deposits. 

Eeserves 
held  in 
lawful 
money. 

Percentages  of 
reserves  held. 

Required 

per  cent. 

i 

o 
a 

o 
73    . 
0-2 

H'-1 

Above 
require- 
ments. 

Bryan. 

McKinley. 

Col.,  Nev.      .    . 
N.  C.,  S.  C.,  Ga., 
Florida,  Ala., 
Miss.,   Louisi- 
ana, Tex.,  Ar- 
kansas, Tenn. 
S.  Dak.,  Idaho,' 
Mont.,    Utah, 
Wash.,  Wyo. 

Southern  and  \ 

Mo.,  Kans.,  Ne- 
braska   .    .    . 

Virginia     .    .    . 
Middle  States 

Eastern  States 

Bryan  States 

Banks  in  reserve 

States 

2 

10 

6 
Ve 

3 
1 

Cal.,  Or.    .    . 

Kentucky 
N.  Dak.     .    . 

2 

1 
1 

No.  7 

No.  4 

No.  S 

106 

466 

182 

$ 
43,966,110 

84,684,280 
36,954,766 

* 
12,760,391 

15,279,867 
6,339,336 

6 

H 

It 
(1 

4t 
it 

u 
t( 

u 

u 

n 

u 

12J 

U 

it 

25 

29.02 

18.04 
17.15 

23.02 

12.04 
11.15 

754 

165,605,156 

34,379,594 

20.76 

14.76 

Ohio,      Ind., 
III.,   Mich., 
Wis.  .    .    . 
la.,  Minn.,    . 
Del.,     Mary- 
land, West 
Virginia     . 

5 
2 

3 

No.  5 
No.  6 

No.  3 

697 
492 

135 

169,427,366 

67,6',i7,'.«>n 

36,600,420 

26.  752,230 
9,055,803 

4,884,453 

15.79 
13.38 

13.35 

9.79 
7.38 

7:35 

1,324 

273,725,686 

40,6!t'.4.si; 

14.86 

8.86 

N.  Y.,    N.  J., 
Penn.     .    . 
Me.,    N.   H., 
Ver.,  Mass., 
R.  I.,  Conn. 

3 
6 

No.  2 
No.l 

717 
534 

251,007,560 
162,750,540 

27,532,049 
16,382,477 

10.97 
10.07 

4.97 
4.07 

1,251 

413.7.58,168 

43,715,126 

10.61 

4.61 

McKinley 
es  of  second  ch 

Total 
Country 
Banks 

in  Bryan 

22 
:it 

23 

iss 

3,329 

853,088,942 

118,987,306 

13.94 

7.94 

35 
234 

45,960,452 
419,561,590 

10,040,134 
72,620,837 

23.15 
17.31 

10.65 
4.81 

Banks  in  reserve  cities  of  second  class  in  McKin- 

Total  number  of  banks  in  reserve  cities  of  sec- 

269 

78 

465,522.042 
480,14.=>.74i; 

83,260,971 
140,895,085 

17.88 

29.34 

5.38 
4.34 

Banks  in  central  res 
Total  reserve  banks 
Total  banks  in  Unit 

>erve  cities  

:H7 

945,667,788 

224,156,056 

2.-!.  7d 

4.85 

ed  States     

3,676 

1,798,756,730 

343,143,362 

19.07 

6.60 

RESERVES    A   COMMON    STANDARD    FOR   COMPAR- 
ISON. 

In  order  to  compare  banking  conditions  in  dif- 
ferent parts  of  our  country,  a  common  standard 


52      CONDITION  OF  BANKING  RESERVES 

must  be  adopted  and  the  banks  be  compared  with 
each  other  with  regard  to  that.  The  standard 
used  in  the  above  table  is  the  percentage  to  demand 
obligations  of  cash  reserve  in  lawful  money  held 
in  the  custody  of  the  banks.  In  this  table  the  di- 
visions are  not  arranged  numerically  as  in  the 
Comptroller's  report,  but  according  to  percentage 
of  reserve  then  held. 

KESEKVES    OF   COUNTRY    BANKS. 

When  the  eight  divisions  comprising  3,329  coun- 
try banks  are  compared  by  this  standard,  it  ap- 
pears that  the  754  country  banks  in  the  Southern 
and  Western  States  hold  the  largest  average  per- 
centage of  cash  reserves,  20.76  per  cent,  of  their 
demand  obligations  ;  the  1,324  country  banks  of  the 
Middle  States  the  next  largest,  14.86  per  cent. ;  and 
the  1,251  country  banks  of  the  Eastern  States  the 
lowest  percentage,  only  10.61  per  cent. 

RESERVES    OF    BANKS   IN    SECOND    CLASS   RESERVE 

CITIES. 

Of  the  269  banks  in  reserve  cities  of  the  second 
class,  the  35  banks  in  cities  in  Bryan  States  hold  a 
much  larger  percentage  of  reserve  than  the  234 
banks  in  cities  in  McKinley  States,  the  percentages 
being  23.15  and  17.31  respectively. 

RESERVES    OF    BANKS    IN    CENTRAL    RESERVE 

CITIES. 

The  78  banks  in  central  reserve  cities  are  a  class 
by  themselves,  and  hold  29.34  per  cent,  in  lawful 


POWERFUL  ELEMENT  OF  DISTURBANCE   53 

money.     The  average  of  all  banks  in  reserve  cities 
is  23.70. 

THE   WEAK    SPOT    IS    IN    COUNTRY    BANKS   IN   THE 

EASTERN    STATES. 

If  there  is  any  weakness  as  regards  lawful  money 
reserve  in  the  banks  thus  classified  it  must  be  in 
the  1,251  country  banks  in  the  '  McKinley  Eastern 
States '  of  New  York,  Pennsylvania,  New  Jersey, 
Maine,  New  Hampshire,  Rhode  Island,  Vermont, 
and  Connecticut,  which  hold  only  10.61  per  cent, 
of  cash  reserves.  These  banks  with  their  large 
deposits  bring  down  the  average  percentage  in  law- 
ful money  for  the  whole  country  to  19.07  of  demand 
obligations.  These  1,251  Eastern  banks,  with  only 
their  10.61  per  cent,  of  cash  reserves,  form  a  pow- 
erful element  to  disturb  the  condition  of  the  East- 
ern reserve  cities  at  the  slightest  alarm.  This  has 
been  noticed  in  every  panic.  The  example  of  the 
so-called  '  Bryan  States '  might  be  followed  with  ad- 
vantage by  these  1,251  banks  in  the  Eastern  States. 

THE  AMOUNT  OF  LAWFUL  MONEY  RESERVE  HELD 
ABOVE  LEGAL  REQUIREMENTS. 

The  amount  of  reserve  required  by  the  National 
Banking  Act  to  be  held  in  lawful  money  by  coun- 
try banks  is  6  per  cent.,  by  banks  in  reserve  cities 
of  the  second  class,  12.50  per  cent.,  and  by  banks 
in  central  reserve  cities,  25  per  cent.  Banks  must 
maintain  these  percentages  under  penalty  of  the 
appointment  of  receivers.  These  percentages  there- 
fore form  a  dead  line  beyond  which  banks  can  go 


54      CONDITION  OF  BANKING  RESERVES 


only  at  the  peril  of  their  lives,  and  consequently 
they  all  hold,  or  strive  to  hold,  for  safety  a  margin 
of  lawful  money  above  these  requirements.  The 
following  statement  shows  how  much  reserve  in 
lawful  money  the  national  banks  have  in  their  own 
custody  above  legal  requirements,  which  they  are 
at  liberty  to  use  before  calling  for  outside  help. 
The  statement  is  condensed  thus  :  — 

TABLE  II. 

Surplus  lawful  money  reserves  above  legal  requirements. 


No.  of 
Banks. 

3,329 

Class. 

Deposits. 

Cash  Reserve. 

Surplus 
held 
above  le- 
gal require- 
ments. 

Required. 

Held. 

Country  banks    .    .    . 

$853,088,942 

$48,278,026 

$118,987,306 

$70,709,280 

269 

Reserve  cities  of  sec- 

ond class      .... 

465,522,042 

57,217,038 

83,260,971 

26,043,933 

78 

Central  reserve  cities  . 

480,145,746 

118,877,525 

140,895,085 

22,017,560 

3,676 

Total  national  banks 

$1,798,756,730 

$224,372,589 

$343,143,362 

$118,770,773 

To  appreciate  the  full  significance  of  this  state- 
ment, a  comparison  must  be  made  between  the  total 
amount  of  deposits  in  the  3,676  national  banks, 
when  this  statement  was  rendered,  which  was 
$1, 798,756, 734,  and  the  amount  of  the  surplus  re- 
serve they  held  over  that  required  by  law,  which 
was  $118,770,775.  The  surplus  reserve,  therefore, 
for  which  they  could  be  called  upon  by  depositors, 
and  could  pay  out  to  them  without  reducing  their 
reserves  below  the  financial  dead  line,  was  only  6.6 
per  cent. 


GROUPS   OF  BANKS   COMPARED  55 

COMPARISON    OF   COUNTRY   BANKS. 

A  particular  examination  of  this  table  in  connec- 
tion with  the  preceding  one  is  required.  When 
the  different  classes  of  country  banks  are  compared 
with  each  other,  their  relative  position  as  to  sur- 
plus reserve  is  the  same  as  when  the  gross  cash 
reserve  only  was  considered.  It  appears  that  the 
country  banks  in  the  Southern  and  extreme  West- 
ern States,  754  in  number,  with  $165,605,156  of 
deposits,  were  in  the  strongest  position,  with  a  sur- 
plus reserve  in  lawful  money  of  14.76  per  cent, 
above  the  percentage  required  by  law.  The  coun- 
try banks  in  the  Middle  States  rank  next,  with 
their  1,324  banks  holding  deposits  to  the  amount 
of  $273,725,686.  Their  surplus  in  lawful  money  is 
8.86  per  cent.  The  Eastern  country  banks,  1,251 
in  number,  holding  deposits  of  $413,758,108,  held 
a  surplus  reserve  in  lawful  money  of  only  four  and 
six  tenths  (4.6)  per  cent.  As  the  deposits  of  the 
Eastern  banks  are  much  the  largest,  they  bring 
down  the  average  of  the  total  3,329  country  banks, 
holding  1853,088,942  deposits,  to  a  surplus  of  law- 
ful money  reserve  of  only  7.94  per  cent. 

COMPARISON    OF    BANKS    IN    RESERVE    CITIES. 

We  will  now  examine  the  condition  of  banks  in 
reserve  cities.  For  the  purpose  of  comparison,  the 
reserve  cities  of  the  second  class  may  be  divided 
into  '  Bryan  '  and  '  McKinley  '  cities.  It  then  ap- 
pears that  the  35  banks  in  cities  in  Bryan  States, 
with  deposits  of  145,960,452,  had  a  surplus  reserve 


56      CONDITION  OF  BANKING  RESERVES 

in  lawful  money  of  10.65  per  cent.,  and  the  234 
banks  in  cities  in  McKinley  States,  holding  depos- 
its of  $419,561,590,  had  a  surplus  of  only  5.81  per 
cent.  As  there  are  but  three  central  reserve  cities, 
they  form  a  single  class,  with  78  banks  holding 
$480,145,746  deposits  and  with  a  surplus  reserve 
in  lawful  money  above  the  apprehension  rniuimum 
of  4.34  per  cent. 

The  following  gives  these  percentages  in  con- 
densed form :  — 

TABLE  III. 

Shelving  Percentages  of  Surplus  Reserves. 


<x>  a  >-> 

!|i 

s| 

Class. 

MH  gj    . 

t*»  a, 
.£•3  > 

g<2  g 

QJ    Q* 
O3          -*J 

g  5  ®  §, 

£  §  ® 

*E>  | 

PH 

PH 

OQ 

Per  cent. 

Per  cent. 

Per  cent. 

Conntry  banks  in  Southern  and  Western 

6 

20.76 

14.76 

In  Middle  States    

6 

14.86 

8.86 

In  Eastern  States  

6 

10.61 

4.61 

6 

13.96 

7.94 

Reserve  banks  in  Bryan  cities  of  second 
class  .                    

12* 

23.15 

10.65 

Reserve  banks  in  McKinley  cities  of  sec- 
ond class                   

17.31 

4.81 

Reserve  banks  in  central  reserve  cities 

25 

29.34 

4.34 

Average  of  all  national  banks  in  United 
States    

19.07 

6.60 

COMPARISON    OF    CONDITION    OF    EASTERN   AND 
WESTERN    BANKS. 

Banks  in  the  East  and  West  may  be  approxi- 
mately compared  as  follows :  The  1,251  Eastern 
country  banks,  the  234  banks  in  reserve  cities  of 
the  second  class  in  McKinley  States,  and  the  78 


COMPARISON  OF  RESERVES 


57 


banks  in  the  central  reserve  cities,  making  1,563 
banks  out  of  3,676,  hold  $1,313,465,504  depos- 
its out  of  a  total  of  11,798,756,730,  and  yet  their 
surplus  reserve  of  lawful  money  is  only  about 
$63,600,000,  or  less  than  5  per  cent.  The  South- 
ern and  Western  country  banks,  754  in  number, 
the  1,324  country  banks  of  the  Middle  States, 
and  the  35  banks  in  second  class  reserve  cities  in 
Bryan  States,  being  2,113  banks  out  of  3,676, 
hold  deposits  amounting  to  $485,291,294,  and 
have  a  surplus  reserve  in  lawful  money  of  $55,- 
100,000,  or  over  11  per  cent.,  or  nearly  two  and 
one  half  times  the  percentage  of  the  McKinley 
banks.  This  is  more  clearly  set  forth  in  the  fol- 
lowing table :  - 

TABLE  IV. 

Comparison  between  Eastern  and  Western  Country  Banks  and  Reserve  Cities. 


No.  of 
Banks. 

Class. 

Deposits. 

Surplus  Re- 
serve above 
requirements 
partly  est'd. 

Per 
cent. 

1,251 

Country  banks    in  East- 
ern States  

$413,758,168 

$19,600,000 

234 

78 

Banks    in   McKinley   re- 
serve cities,  2d  class    . 
Banks    in    reserve    cen- 
tral     

419,561,590 
480,145,746 

22,000,000 
22,017,560 

$1,313,465,504 

$63,600,000 

4.84 

754 
1,324 

Country  banks  in  South- 
ern and  Western  States 
Country  banks  in  Middle 
States     

$165,605,156 
273,725  686 

£25,600,000 
25,500,000 

35 

Banks  in  Bryan  reserve 
cities,  2d  class     .     .     . 

45,960,452 

4,000,000 

$485,291,294 

$55,100,000 

11.35 

Totals      

$1,798,756,798 

$118,700,000 

58      CONDITION  OF  BANKING  RESERVES 
SUKPLUS   RESERVES   ENTIRELY    TOO    SMALL. 

But  whatever  excess  may  be  held  by  banks  re- 
mote from  financial  centres  is  counterbalanced  by 
the  paucity  in  reserve  carried  by  banks  in  more 
convenient  and  accessible  localities,  and  the  net 
result,  taking  the  national  banks  as  a  whole,  is  that 
they  had  on  hand,  October  6, 1896,  in  lawful  money, 
a  surplus  over  the  amount  required  by  law  to  be 
held,  equal  to  6.6  per  cent,  of  their  demand  obli- 
gations, which  must  be  acknowledged  to  be  en- 
tirely too  small  for  safety. 

SURPLUS    RESERVES    MAY    DISAPPEAR    IN    ONE  DAY. 

•  It  is  a  rule  among  bankers  that  deposits  seldom 
or  never  fluctuate  more  than  11  per  cent,  in  one 
day.  It  is  therefore  evident  that  in  the  fraction 
of  any  day  the  banks  of  the  country  are  liable  to 
lose  all  their  surplus  lawful  money  reserves  unless 
they  have  some  other  resources  from  which  to  re- 
plenish them.  If  the  6.6  per  cent,  is  withdrawn 
by  depositors,  then  the  law  requires  the  banks  to 
cease  discounting  until  their  reserves  are  restored. 
This  is  the  most  prominent  admonition  on  the 
blanks  for  quarterly  reports.  This  means  a  sus- 
pension of  banking  facilities  all  over  the  country. 
It  therefore  becomes  necessary  to  examine  what 
further  resources  the  banks  have  and  what  is  their 
power  to  relieve  them  in  case  of  necessity. 


DEPOSIT  RESERVES 


59 


EXAMINATION    OF    DEPOSIT    RESERVES. 

It  is  developed  by  this  examination  that  the 
banks  have  credits  on  each  other's  books,  a  certain 
part  of  which  can  be  called  a  reserve  under  the 
provisions  of  the  National  Banking  Act.  These 
deposit  reserves  are  as  shown  by  the  following 
table :  — 

TABLE  V. 

Deposit  Reserves. 


Division. 

States. 

o  $ 

43 

6  js 

Deposit 
Reserves. 

Totals. 

!~t 

OH 

No.  7 

"    4 

Col.,  Nev.,Cal.,Or  
N.  C.,  S.  C.,  Ga.,  Fla.,  Ala., 
Miss.,  La.,  Tex.,  Ark.,  Ky., 
Tenn  

4 
11 

$5,017,984 
10,823,072 

"    8 

S.  Dak.,  Idaho,  Mont.,  Utah, 
Wash.,  Wyo.,  N.  Dak.    .     . 

7 

5,575,697 

Deposit    reserves    of    banks 
in   Southern  and   Western 
States  

$21,416,753 

12.93 

"    5 
"    6 
"    3 

Ohio,  Ind.,  111.,  Mich.,  Wis.   . 
Mo.,  Kan.,  Neb.,  la.,  Minn.  . 
Va.,Del.,  Md.,W.  Va.  .     .     . 

5 
5 
4 

$24,131,864 
12,156,785 
5,050,329 

Deposit  reserves  of  banks  in 
Middle  States    

41,338,978 

15.10 

"    2 

N  Y  ,  N.  J.,  Peun  

3 

834,851,844 

"     1 

Me.,  N.  H.,  Ver.,  Mass.,  R.  I., 

6 

27,391,336 

Deposit  reserves  of  banks  in 
Eastern  States             .          . 

62,^43,180 

15.03 

"1-8 

Deposit  reserves  of  3,329  coun- 
try banks                     . 

$124,998,911 

"    9 

Deposit  reserves  of  2G9  banks 
in  reserve  cities  of  second 
class     

65,078,622 

Lawful  deposit  reserves  of  all 
national  banks  

$190,077,533 

60      CONDITION  OF  BANKING  RESERVES 
DEPOSIT   RESERVES  VALUELESS   IN  AN  EMERGENCY. 

That  is,  the  3,329  country  banks  can  draw  on 
their  reserve  agents  for  $124,990,911  in  case  of 
need,  and  the  269  banks  in  reserve  cities  of  the 
second  class  can  likewise  draw  on  their  reserve 
agents  for  $65,028,622,  making  a  total  of  $190,- 
077,533.  But  these  reserve  banks  have  current 
deposit  obligations  of  $945,667,788,  and  have  only 
a  cash  reserve  of  $224,156,056.  It  follows  that  if 
the  country  banks  and  banks  in  reserve  cities  of 
the  second  class  should  ask  for  their  $190,000,000, 
there  would  be  only  $34,000,000  left  to  provide 
for  the  balance  of  the  deposits  of  the  reserve  banks 
($750,000,000),  or  about  5  per  cent. 

DEMAND   FOR   DEPOSIT    RESERVES   PRODUCES 

SUSPENSION. 

The  prospect  of  this  condition,  of  course,  would 
produce  a  suspension  for  self-protection,  and  as  a 
result  the  country  banks  would  find  at  the  first 
signal  of  danger  that  their  deposit  reserves  were 
unavailable.  This  happened  in  1893.  Then  came 
a  wild  scramble  for  currency,  and  every  one  of  the 
3,676  banks  became,  under  the  stimulus  of  the  fear 
of  receivership,  a  competitor  with  every  other  in 
an  effort  to  hoard  lawful  money.  The  demand  for 
money  extended  from  the  banks  through  all  the 
business  community,  and  all  borrowers  in  the 
general  market  found  their  facilities  withdrawn. 
"  Liquidate  and  pay  up  "  was  the  cry,  and  the  re- 
sult was  many  failures  and  untold  losses. 


THE  FINANCIAL  DEAD  LINE  61 

Any  calamity  which  threatens  the  nation  is  suffi- 
cient to  set  the  ball  rolling.  When  the  reserves 
in  the  larger  cities  begin  to  decline,  from  whatever 
cause,  public  confidence  is  unsettled,  and  a  vague 
feeling  of  apprehension  takes  hold  of  all  business 
centres,  and  all  financial  concerns  begin  to  fortify 
themselves. 

THREAT    OF    RECEIVERSHIP. 

It  is  the  fundamental  provision  of  the  National 
Banking  Act  (chapter  5,  section  95),  that  if  the 
reserve  is  not  made  good  in  thirty  days  after  notice, 
a  receiver  may  be  appointed  for  the  delinquent 
bank.  When  it  is  considered  that  a  loss  of  6.6 
per  cent,  of  deposits  would  produce  a  simultaneous 
locking  up  of  deposit  reserves,  and  this  might  oc- 
cur almost  over  night,  we  can  see  that  the  appre- 
hension of  business  men  and  their  solicitude  over 
the  state  of  the  reserves  is  well  founded. 


STABILITY    NOT   POSSIBLE   UNDER    SUCH    CONDI- 
TIONS. 

Such  a  condition  of  affairs  takes  away  all  free- 
dom from  business,  which  must  be  slow  and  dull 
to  be  safe.  If  it  becomes  at  all  active  and  trans- 
actions are  multiplied,  then  the  feeling  of  confi- 
dence is  liable  at  any  moment  to  be  interrupted  by 
a  spasm  of  apprehension.  Stability  and  confidence 
cannot  exist  any  length  of  time  under  such  condi- 
tions. 

Table  V.  also  shows,  as  the  previous  tables  have 


62      CONDITION  OF  BANKING  RESERVES 

shown,  that  the  banks  in  the  Southern  and  West- 
ern States  constitute  less  disturbing;  factors  than 

o 

those  of  the  Middle  and  Eastern  States,  as  their 
percentage  of  deposit  reserves  is  smaller  than  that 
of  the  last  named  States. 

ASSISTANCE   FROM   OTHER   BANKS. 

But  it  may  be  said  that  the  report  of  the  Comp- 
troller shows  that  there  are  due  from  other  national 
banks,  besides  reserve  agents,  $111,830,935 

and  from  state  banks,  etc.,  29,583,299 

or  a  total  of  $141,414,234 

which,  added  to  the  amount  due 

from  reserve  agents,  190,077,533 

makes  a  total  for  which  the  banks 

may  draw  on  other  banks,  of  $331,491,767 

But  is  this  a  help  or  an  aggravation?  It  is  a 
help  only  in  quiet  times,  but  in  any  time  of  dan- 
ger it  is  most  assuredly  an  aggravation,  because  in 
theory  the  whole  amount  is  cash,  while  in  fact  it 
could  not  be  paid  or  collected  if  distrust  had  taken 
hold  of  the  community. 

A  collapse  in  confidence  must  take  place  when 
one  half  of  the  reserve  is  found  to  be  unavailable. 

ASSISTANCE   FROM   LOANS   AND   DISCOUNTS. 

But  it  is  urged  that  the  banks  have  their  bills 
receivable  and  securities  to  which  they  can  have 
recourse  for  self-protection.  Every  business  man 
knows  what  that  means.  It  is  that,  if  a  merchant 
has  notes  out,  the  banks  may  require  him  to  curtail 


A   MAIN  DEPENDENCE  63 

or  even  stop  his  business  to  provide  them  with  the 
funds  needed  to  restore  their  reserves.  Or,  if  a 
borrower  has  pledged  securities,  he  may  be  re- 
quested to  sell  them  at  whatever  sacrifice  to  get 
the  cash  for  the  bank.  What  more  suicidal  policy 
could  be  invented  ? 

ASSISTANCE    FROM   THE   NEW   YORK    STOCK 

EXCHANGE. 

Under  such  a  condition  of  affairs  a  main  depend- 
ence of  our  banks  becomes  the  place  where  money 
can  be  had  if  it  is  necessary  to  sacrifice  securities. 
Convertibility  is  the  one  quality  demanded  and 
relied  upon.  If  a  security  is  convertible  it  is  good 
collateral ;  if  it  is  inconvertible  it  is  not  wanted. 
This  is  a  sound  rule  in  many  respects,  but  in  others 
it  is  unsound.  It  leads  the  banks  to  overlook  the 
true  character  of  a  security  and  rely  upon  a  ficti- 
tious one.  Legitimate  business  is  made  less  desir- 
able than  speculative.  Speculation  is  fostered  and 
commerce  is  left  unaided.  Most  borrowers  have 
heard  from  bank  presidents  the  offer  of  all  the 
money  they  want  on  active  stocks.  During  the 
panic  of  1893  a  large  New  York  bank  offered  un- 
limited amounts  to  an  Iowa  banker  if  he  would 
give  stock  exchange  collateral.  The  generous  offer 
only  awakened  laughter.  The  security  held  by 
country  bankers  was  based  on  the  produce  of  the 
soil,  and  that  commanded  the  exchange  by  ship- 
ment to  Europe,  which  brought  the  country  safely 
through  the  pending  crisis  when  the  movement  of 
securities  was  all  in  the  contrary  direction. 


64     CONDITION  OF  BANKING  RESERVES 

The  banks  by  our  system  are  compelled  to  look 
to  the  stock  exchange  as  the  most  valuable  ad- 
junct to  their  business.  When  all  other  resources 
fail,  when  cash  is  gone,  call  loans  all  called  in, 
then  the  stock  exchange  is  still  open,  and  when 
that  shuts  its  doors,  the  clearing  house  also  must 
suspend. 

CONDITION    OP   THE    BANKS   A   PERIL   TO   THE 

COMMUNITY. 

So  the  situation  of  our  banks  is  that  they  have 
but  a  few  per  cent,  in  surplus  reserves  of  lawful 
money,  and  when  distrust  has  locked  up  their 
deposit  reserves,  their  only  resource  to  avoid  a 
receivership  is  to  slaughter  the  business  com- 
munity. 

This  diagnosis  locates  the  disease. 


VIII 

FALLACIOUS  REMEDIES 

To  cure  the  currency  famine  which  the  rela- 
tive smallness  of  the  surplus  reserves  renders 
imminent  at  any  moment,  many  fallacious  reme- 
dies are  proposed. 

INFLATION. 

One  is  that  the  government  shall  issue  more 
money,  so  that  there  shall  always  be  an  abundance. 
This  proposition  is  based  on  ignorance  and  reck- 
lessness. 

Those  who  urge  an  increase  in  the  volume  of 
government  money,  silver  or  paper,  do  not  consider 
it  an  objection,  but  rather  a  recommendation,  that 
such  a  course  would  surely  place  a  premium  on 
gold.  But  leaving  out  of  the  discussion  the  ad- 
vantages or  disadvantages  of  an  irredeemable 
paper  currency,  because  neither  side  can  convince 
the  other,  it  must  be  acknowledged  that  if  banks 
are  to  be  conducted  on  the  credit  system,  which 
means  with  a  reserve  of  only  a  percentage  of  their 
demand  obligations  on  hand  in  cash,  they  are  liable 
to  calls  for  cash  to  an  amount  more  than  equal 
to  their  reserves,  and  at  such  times  all  floating 
money  is  in  demand  also.  The  increase  of  legal 
money  does  not  affect  the  relation  of  a  bank's 


66  FALLACIOUS  REMEDIES 

demand  liabilities  to  its  reserve  of  lawful  money. 
If  the  amount  of  legal  money  is  increased  beyond 
the  needs  of  the  country,  the  first  effect  will  be 
that  metallic  money  will  be  driven  out  of  circula- 
tion, and  the  second  that  all  commodities  and  ser- 
vices will  rise  in  price  to  equal  the  expansion  of 
the  currency.  When  these  two  results  have  come 
to  pass,  the  equilibrium  will  be  restored  between  the 
amount  of  currency  in  circulation  and  the  valua- 
tion of  goods  and  services  to  be  exchanged ;  and 
the  relations  of  cash  to  commodities,  and  of  reserves 
to  liabilities,  will  be  the  same  as  before  the  suspen- 
sion. The  inflation  will  affect  all  equally.  Then 
the  liability  to  embarrassment  from  demands  for 
cash  in  excess  of  reserves  on  hand  will  exist  just 
as  before  the  inflation.  Inflation  of  the  volume 
of  currency  cannot  change  the  relations  between 
reserves  and  demand  obligations,  and  as  a  means 
of  satisfying  demands  of  depositors  inflation  is  a 
hollow  mockery.  It  keeps  the  promise  to  the  ear 
and  breaks  it  to  the  heart. 

CONTRACTION. 

Another  remedy  for  all  ills  is  the  cancellation 
of  government  paper,  especially  the  greenbacks. 
There  is  a  confusion  of  ideas  in  this  suggestion. 

The  object  of  the  retirement  of  the  legal  tenders 
is  to  relieve  the  government  of  the  duty  and  re- 
sponsibility of  maintaining  their  payment  in  gold, 
which,  however,  would  be  no  burden  if  the  income 
of  the  government  were  increased  so  that  the  "  end- 

o 

less  chain  "  worked  in  the  other  direction.     The 


CONTRACTION  NO  REMEDY  67 

result  of  retirement  would  be  the  extinguishment 
of  a  large  part  of  the  lawful  money  of  the  country. 
It  is  evident  that  the  banks  already  hold  too  small 
a  reserve  of  lawful  money  to  admit  of  further  di- 
minution, and  a  funding  of  the  legal  tenders  would 
be  felt  first  by  them,  and  a  serious  stringency  would 
follow.  But  it  is  a  part  of  the  plan  to  have  the 
banks  either  voluntarily  or  by  compulsion  subscribe 
for  the  funding  bonds  and  use  them  as  security  for 
national  bank  circulation,  so  as  to  prevent  contrac- 
tion. The  character  of  this  new  issue,  it  must  be 
seen,  would  be  different  from  the  legal  tenders. 
The  currency  would  be  changed  from  being  the 
obligation  of  the  sovereign  power  which  only  can 
"  coin  "  lawful  money,  and  made  the  obligation  of 
banks,  which  should  not  be  counted  as  part  of  the 
lawful  money  reserve.  If  it  is  given  a  forced 
character  of  lawful  money,  then  it  had  better  be 
continued  as  at  present  without  placing  it  on  an 
interest  basis.  If  it  is  not  lawful  money,  then  it 
creates  a  vacuum  in  the  reserves  which  it  would  be 
difficult  for  the  banks  to  fill.  If  it  is  lawful 
money  the  condition  of  the  banks  as  regards  their 
reserve  would  be  left  just  as  it  is  at  present. 

The  remedy  does  not  touch  the  disease.  It  is 
like  giving  a  pill  to  a  man  who  has  a  broken  leg. 
The  difficulty  with  our  financial  situation  is  that 
we  are  exposed  to  the  danger  of  panics  because  our 
banks  have  too  small  a  reserve  and  have  no  mode 
for  meeting  additional  calls  without  serious  in- 
jury to  business  interests.  Contraction  of  this 
kind  only  changes  the  character  of  a  part  of  their 


68  FALLACIOUS  REMEDIES 

reserves.  It  does  not  propose  to  give  the  banks 
any  protection.  Consequently  as  a  remedy,  the 
retirement  of  the  greenbacks  has  no  efficacy,  and 
as  a  proposition  to  perfect  our  banking  system  it 
has  no  pertinency. 

Funding  the  greenbacks  would  produce  a  wide- 
spread distress  similar  to  that  which  was  produced 
by  the  Wilson  tariff.  This  measure  of  funding 
the  greenbacks  is  advocated  by  those  who  believed 
in  and  secured  the  adoption  of  that  tariff,  and  the 
sad  experience  it  caused  should  produce  in  them  a 
becoming  modesty  and  prevent  them  from  again 
urging  a  similar  upheaval  of  existing  conditions, 
lest  it  might  be  followed  by  a  similar  catastrophe. 

A   MULTIPLICATION    OF    BANKS. 

Nor  is  the  still  further  multiplication  of  indi- 
vidual competitive  banks  a  help  to  meet  the  de- 
mands of  depositors  or  to  maintain  reserves  and 
thus  secure  stability. 

The  more  banks  of  this  class  there  are,  whether 
small  or  great,  the  more  competitors  there  are  for 
the  floating  cash.  The  battlefield  is  enlarged  and 
the  combatants  are  increased  in  number,  but  the 
principle  of  mutual  destruction  as  the  price  of 
safety  is  not  changed  thereby.  It  would  be  a  good 
thing  to  have  small  banks  of  $20,000  capital  in 
towns  of  4,000  inhabitants,  provided  they  had  ac- 
cess to  a  higher  grade  of  banks  for  assistance  in 
case  of  need.  Without  such  protection,  small 
banks  had  better  not  be  created,  for  they  would 
only  add  fuel  to  the  flames,  and  many  of  them 


WHOEVER  IS   CAUGHT  69 

would  be  certain  to  meet  an  untimely  end  in  their 
first  panic.  And  if  as  large  banks  as  the  Bank  of 
England  or  the  Credit  Lyonnais  were  established, 
even  they  would  need  the  support  to  be  obtained, 
from  the  announcement  that  their  bills  receivable 
are  "  immediately  discountable  "  at  an  issue  depart- 
ment or  a  bank  of  a  higher  grade  than  themselves. 
The  difference  between  the  two  banks  above  named 
is  that  one  goes  to  the  Bank  of  France  without 
advertisement,  the  other  with. 

INSUFFICIENT   DEVICES    FOR   REDEMPTION. 

Another  fallacious  remedy  is  that  certain  de- 
vices shall  be  used  to  secure  the  ultimate  payment 
of  notes  issued  by  sinking  funds  or  a  system  of 
redemption  agencies.  This  is  based  upon  the  idea 
of  the  children's  game  of  "  passing  the  ring."  The 
one  who  is  caught  with  it  pays  the  penalty.  Who- 
ever is  caught  with  the  currency  on  hand  at  the 
time  of  the  failure  of  the  bank  must  wait  and  col- 
lect his  dividends  thereon  as  the  failed  bank's 
affairs  are  liquidated.  This  makes  distrust  the 
test  of  solvency,  and  invites  runs  and  renders  the 
currency  of  no  value  to  perform  its  duty  through- 
out the  length  and  breadth  of  the  land.  The  rem- 
edy in  this  case  is  worse  than  the  disease.  If  the 
test  question  is  asked,  whether  the  banks  will  agree 
always  to  accept  at  par  currency  protected  by  these 
devices,  the  answer  is  promptly,  No,  it  is  only  in- 
tended for  the  public,  not  for  the  banks. 


70  FALLACIOUS  REMEDIES 

BELIEF    BY  MEANS    OF   A   TRUSTEED    CURRENCY. 

As  a  way  out  of  this  dilemma,  the  proposition  is 
made  to  incorporate  our  clearing  houses  under 
federal  law,  and  grant  to  one  in  each  State  the 
power  to  receive  collaterals  from  their  bank  mem- 
bers and  advance  thereon  75  per  cent,  in  circulat- 
ing notes  good  at  any  clearing  house  in  the  coun- 
try, each  clearing  house  to  be  the  first  guarantor 
of  its  own  notes.  This  method  would  enable  the 
banks  to  meet  the  wants  of  depositors  and  bor- 
rowers with  a  currency  which  would  be  at  par  all 
over  the  United  States,  and  at  the  same  time  re- 
tain their  lawful  money  reserves  untouched.  The 
aegis  of  protection  should  be  extended  over  bank 
reserves  as  well  as  over  manufactures.  The  ap- 
proach to  the  apprehension  minimum,  and  all 
hoarding  of  lawful  money,  and  runs  on  banks  in- 
stigated by  fear  of  a  currency  famine,  would  be 
avoided. 

By  this  system  the  pressure  would  be  removed 
both  from  the  banks  and  the  business  community, 
and  monetary  panics  could  not  occur.  Coopera- 
tion and  not  competition,  peace  and  not  strife,  would 
be  the  law  of  banking.  More  conservative  methods 
of  doing  business  would  be  established  and  the 
banks  could  afford  to  carry  a  larger  reserve  of 
lawful  money.  Stability  and  confidence  would 
become  the  permanent  supports  of  business. 

Our  republican  banking  system  can  be  made  as 

preeminent  among  the  nations  of  the  world  as  is 

'  our  judicial  system.     It  needs  but  to  be  completed. 


ELEMENTS   OF  SAFETY  71 

The  same  method  by  which  we  organize  individual 
citizens  into  townships,  counties,  and  states,  and  yet 
preserve  their  equality  and  independence,  can  be 
applied  to  organize  individual  financial  interests 
into  banks,  clearing  houses,  and  clearing  house  dis- 
tricts by  bringing  them  all  under  federal  control. 

The  elements  of  safety  in  a  currency  so  issued 
are  three  :  - 

First,  the  actual  pledge  of  approved  security 
with  ample  margin  in  the  hands  of  the  state  clear- 
ing house  as  trustee  for  the  note-holder. 

Second,  the  assurance  the  public  would  have  of 
conservative  action  by  the  loan  committee  in  judg- 
ing of  the  goodness  and  adequacy  of  the  collat- 
eral pledged,  from  their  experience  and  ability, 
their  representative  position,  and  their  pecuniary 
interest  as  stockholders  in  banks  which  they  would 
endeavor  to  protect  from  loss  on  their  contingent 
liability  as  guarantors. 

Third,  the  guarantee  by  the  associated  banks 
to  save  the  note-holder  from  loss  or  delay  in  the 
payment  of  the  notes. 

Fourth,  protection  of  legal  reserves  and  conse- 
quent monetary  stability. 

These  characteristics  are  general  and  should  be 
effective  under  all  circumstances,  in  any  State  or 
Territory,  to  produce  conservative  action  and  to 
give  a  safe  currency  to  the  whole  nation. 


IX 

A  DISCUSSION  OF  PRACTICAL  DIFFICULTIES  IN  THE 
WAY  OF  A  UNIVERSAL  SYSTEM 

IS   DIFFERENCE   IN    ACCUMULATED   WEALTH    AN 
OBJECTION   TO    A    UNIVERSAL    SYSTEM? 

IT  may  be  objected  that  the  loans  and  currency 
issued  in  one  part  of  the  United  States  would  not 
be  so  safe  as  those  issued  in  another,  and  that  the 
banks  in  the  richer  States  could  not  afford  to  agree 
to  take  at  par  and  hold,  even  for  the  short  time 
needed  to  forward  them  for  collection,  the  notes 
issued  and  secured  in  what  have  been  styled  the 
poorer  States. 

This  presents  a  question  which  must  be  solved, 
and  a  comparison  must  be  made  between  the  differ- 
ent sections  of  our  land  to  discover  what  founda- 
tion there  is  for  this  objection. 

We  have  already  seen  that  the  Southern  and 
Western  States  hold  the  largest  percentage  in  law- 
ful money. 

The  basis  of  the  present  comparison  must  be  the 
ratio  of  debts  to  assets  in  each  section.  The  con- 
venient mode  of  comparison  used  in  Table  I.  (see 
p.  50),  is  here  followed  again.  The  States  are 
divided  into  two  classes,  those  which  gave  their 
electoral  votes  to  McKinley  and  those  which  gave 


A    COMPARISON  OF  BANKS  73 

them  to  Bryan  in  the  last  presidential  election. 
This  has  the  advantage  in  that  it  separates  what 
have  been  called  the  rich  and  the  poor  States,  and 
thus  takes  an  extreme  view  of  the  situation.  The 
following  tables  have  been  prepared,  in  pursuance 
of  this  method,  from  figures  published  by  the  Comp- 
troller of  the  Currency  and  the  Secretary  of  Agri- 
culture. They  were  used  in  a  similar  manner  in  a 
presentation  of  this  subject  before  Congress. 

An  examination  of  these  tables  will  show  that 
there  is  no  ground  for  the  objection  that  there  is 
in  the  varying  financial  conditions  of  the  different 
sections  of  the  country  an  insuperable  obstacle  to 
the  adoption  of  a  system  intended  to  apply  alike  to 
all  sections. 

At  a  glance  it  will  appear  from  these  tables  that 
the  Bryan  States  have  the  largest  area  and  room 
for  future  growth.  Nine  of  these,  with  4,000,000 
inhabitants,  have  sprung  into  being  in  fifty  years. 
The  new  States  are  now  growing  more  rapidly  than 
the  old.  Comparing  banking  conditions,  bank  de- 
posits in  the  Bryan  States  are  hardly  twice  the 
banking  capital  of  those  States,  while  in  McKinley 
States  they  are  two  and  one  half  times. 


74 


PRACTICAL   DIFFICULTIES 


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76 


PRACTICAL  DIFFICULTIES 


The  figures  contained  in  these  tables  are  con- 
densed in  the  following  table,  which  makes  a  com- 
parison between  loans  and  discounts,  real  and 
personal  property,  farm  products,  manufactures,  and 
mortgages  of  the  McKinley  and  Bryan  States. 

TABLE  VII. 

Percentage  of  Assets  to  Obligations. 


Loans  arid 
Discounts. 

Real  and  Personal 
Property. 

Loans  and 
Discounts, 
Percentage 
of. 

Bryan  States  .     . 
McKinley  States  . 

United  States  .     . 

$246,482,715 
1,615,859,374 

$17,275,299,993 

46,789,803,012 

1.42 
3.45 

2.91 

1,862,342,089 

64,065,103,005 

Farm  Products. 

Loans  and 
Discounts, 
Percent- 
age of. 

Manufactures. 

Loans  and 
Discounts, 
Percent- 
age of. 

Bryan  States 
McKinley  States 

United  States     . 

$993,538,484 
1,462,924,735 

24.70 
110.45 

75.81 

$1,178,030,080 
8,152,123,307 

20.92 
19.82 

19.95 

2,456,463,219 

9,330,154,287 

Mortgages. 

Real  Estate. 

Proportion  of 
Mortgages  to 
Real  Estate. 

Bryan  States  .     . 
MeKinley  States  . 

United  States  .     . 

$1,125,118,186 

4,833,582,018 

$9,311,353,418 
29,599,995,624 

12.08 
16.36 

15.31 

5,958,700,204 

38,911,349,042 

This  is  a  comparison  between  debts  and  assets, 
which  every  merchant  knows  affords  the  only  true 
basis. 


DEBTS  AND  FARM  PRODUCTS  11 

COMPARISON    OF   LOANS    AND    DISCOUNTS. 

It  appears  that  the  loans  and  discounts  of  the 
McKinley  States  are  3.45  per  cent,  of  the  real  and 
personal  property  of  those  States,  while  in  the 
Bryan  States  the  percentage  is  only  1.42  per  cent. 
That  is,  the  percentage  of  banking  debts  to  assets 
is  over  twice  as  great  in  the  McKinley  States  as 
in  the  Bryan  States. 

COMPARISON    OF   FARM   PRODUCTS. 

The  comparison  as  regards  farm  products  is 
still  more  striking.  The  loans  and  discounts  of 
the  Bryan  States  are  but  24.70  per  cent,  of  the 
annual  farm  products  of  those  States.  That  is, 
the  farm  products  could  pay  all  their  banking  dis- 
counts four  times  over  in  one  year.  In  the  Mc- 
Kinley States  the  annual  farm  products  fall  short 
by  10.45  per  cent,  of  the  banking  discounts  of  those 
States.  In  panic  years  this  enormous  surplus  in 
the  Bryan  States  has  not  only  helped  them,  but  the* 
whole  country,  by  supplying  exports  which  com- 
manded the  cash  when  the  best  securities  were 
unavailable. 

COMPARISON  OF  MANUFACTURED  PRODUCTS. 

The  percentage  of  manufactured  products  to  their 
respective  bank  discounts  is  nearly  the  same  in  the 
two  sections,  and  requires  no  comment,  except  to 
call  attention  to  the  fact,  which  to  many  may  be  a 
surprise,  that  the  difference  is  only  a  little  under 
one  per  cent. 


78  PRACTICAL  DIFFICULTIES 

COMPARISON  OP  BURDEN  OF  MORTGAGES. 
In  comparing  the  burden  of  mortgages  to  the 
value  of  real  estate,  again  the  showing  is  in  favor 
of  the  Bryan  States,  their  proportion  of  indebted- 
ness being  only  12.08  per  cent.,  while  that  of  the 
McKinley  States  is  16.36  per  cent. 

ALL  COMPARISONS  FAVORABLE   TO   BRYAN  STATES. 

Thus  it  appears  that  in  all  comparisons  between 
liabilities  and  assets,  the  statistics  show  that  the 
Bryan  States  have  greater  room  for  growth  and  a 
more  promising  future  for  development,  a  larger 
proportion  of  bank  capital  to  deposits,  a  greater 
surplus  of  farm  products,  are  carrying  a  lighter 
burden  of  fixed  charges  in  comparison  with  their 
annual  products,  have  more  recuperative  power, 
and  have  a  greater  value  of  real  estate  to  their 
mortgages  than  the  McKinley  States. 

ADVANTAGES  AND   DISADVANTAGES   OF   DIFFERENT 
SECTIONS    COMPARED. 

The  key  to  any  comparison  between  different 
sections  of  the  country  must  be  found  in  the  pro- 
portion of  resources  to  obligations.  It  cannot  be 
denied,  however,  that  it  is  safer  to  lend  75  per 
cent,  on  a  convertible  asset,  than  35  per  cent,  on 
an  inconvertible  one,  the  intrinsic  value  being  the 
same.  This  explains  the  difference  between  the 
situation  in  the  East  and  in  the  West  and  South. 
The  severe  experience  of  the  past  few  years  has 
contracted  banking  facilities  and  deprived  Western 


SAFE   CONDITIONS  79 

and  Southern  communities  of  the  ability  to  trade, 
and  thereby  made  inconvertible  much  property 
which  formerly  had  a  ready  market,  and  made 
business  unsafe  which  once  paid  a  regular  profit. 

Any  banking  system  worthy  to  be  adopted  by 
Congress  must  be  applicable  to  all  parts  of  the 
country  alike,  and  it  is  evident  from  the  figures 
given  in  tables  I.  to  VII.  that  one  section  cannot 
claim  a  superiority  over  another  either  in  prudent 
management  or  in  abundant  resources. 

No  rule  can  be  made  which  will  apply  to  irregu- 
lar and  speculative  banking.  All  loans  and  dis- 
counts must  be  judged  by  their  individual  merits. 
Surprises  will  happen  in  every  section  of  the 
country.  J5ut  a  generalization  can  be  made  on 
the  prominent  facts  made  apparent  by  statistics. 
It  must  be  allowed  that  banking  can  be  conducted 
safely  in  a  country  where  the  farm  products  will 
pay  the  total  of  bank  discounts  four  times  over 
each  year,  and  yet  all  banking  there  is  not  neces- 
sarily safe.  It  is  also  apparent  that  a  system  of 
banking  which  relies  on  forced  liquidations  as  a 
means  of  maintaining  bank  reserves  operates  with 
special  hardship  and  severity  on  communities 
which  have  not  ready  access  to  exchanges  and 
central  markets,  and  whose  assets,  though  solid, 
are  not  convertible.  Such  communities  become 
prostrated,  so  that  they  may  not  recover  the  lost 
ground  in  a  generation,  while  a  system  which 
would  carry  them  over  panics,  and  avoid  liquida- 
tions, would  prevent  untold  disasters  and  favor 
their  rapid  growth. 


80  PRACTICAL  DIFFICULTIES 

One  section  of  the  country  is  not  independent  of 
another ;  but  the  cotton,  breadstuffs,  and  provisions 
of  the  Southern  and  Western  States  afford  the  coun- 
try the  largest  items  with  which  its  foreign  debts 
are  paid.  As  these  command  the  cash  in  the  mar- 
kets of  the  world,  so  they  afford  the  best  basis  for 
credit  at  home. 

CASH    VALUATIONS    UNIVERSAL. 

In  any  banking  system  all  commodities  are  re- 
duced to  their  cash  value,  and  money  thus  becomes 
a  common  denominator  the  world  over.  Cotton 
may  be  raised  in  a  section  poor  in  accumulated 
capital,  but  it  commands  the  gold  in  Liverpool  as 
well  as  New  York.  Wheat  likewise  may  come 
from  the  inhospitable  North,  but  it  grades  and  sells 
equally  well  in  all  corn  exchanges  of  every  nation. 
Cattle  are  raised  on  plains  not  adapted  for  farm- 
ing, but  their  product  fills  solid  trains  from  the 
West  to  the  East.  All  these  products  form  as  good 
a  basis  for  banking  as  the  garden  truck  of  popu- 
lous counties  near  our  great  cities,  unless  some  as 
yet  undiscovered  law  of  finance  be  found  to  prove 
that  a  dollar's  worth  of  produce  from  one  locality 
is  worth  more  than  a  dollar's  worth  produced  in 
another.  Commodities  which  can  be  turned  into 
cash  in  the  open  market  have  110  superiority  the 
one  over  the  other.  Money  is  as  clean  when  made 
in  packing  hogs  as  in  manufacturing  silk,  and  one 
business  is  as  necessary  and  as  honorable  as  the 
other.  The  strength  of  a  bank  does  not  depend 
upon  the  wealth  of  the  community  in  which  it  does 


THE   UNIVERSAL  DOLLAR  81 

business,  but  on  the  character  of  the  assets  it 
holds.  A  bank  in  Hongkong  or  Shanghai,  China, 
may  have  the  highest  commercial  rating,  and  this 
would  rest  on  the  fact  that  its  assets  are  known  to 
be  convertible  into  cash  at  the  prices  given  in  the 
balance  sheet.  Money  is  the  common  denominator 
in  which  all  commodities  are  exchanged,  and  the 
ores  of  Colorado  and  Alabama  and  Michigan  form 

o 

equally  good  banking  security  at  proportionate 
values  when  moving  to  market,  whether  in  crude 
form  or  as  finished  products.  The  American 
dollar  goes  from  one  end  of  our  country  to  the 
other,  measuring  the  values  of  commodities,  and 
it  is  the  great  leveler  to  bring  all  things  to  a 
common  standard.  Wheat,  corn,  cotton,  lumber, 
tobacco,  and  cattle  are  not  inferior  to  any  other 
commodities,  and  they  form  a  solid  basis  for  credit 
to  their  producers. 

A  thousand  dollars'  worth  of  cotton,  wheat,  or 
tobacco  will  all  pay  the  same  amount  of  debts  in 
New  York  without  regard  to  the  poptilousness  or 
wealth  of  the  sections  from  which  they  have  come. 
All  banking  is  ultimately  founded  on  products  of 
the  soil,  the  mines,  and  the  factory,  and  the  question 
to  ask  is,  not  as  to  the  accumulated  advantages  of 

o 

one  section  over  another,  but  how  the  sections  can 
be  compared  in  ability  to  pay  their  debts,  and 
what  is  the  cash  value  of  the  products. 

The  following  statement  of  the  banking  situa- 
tion in  seven  Southern  States  brings  this  contrast 
strikingly  into  view. 


82 


PRACTICAL  DIFFICULTIES 


TABLE  VIII. 

Seven  Southern  States. 


State. 

Num- 
ber of 
Banks. 

Capital 
Stock. 

Deposits. 

Loans  and 
Discounts. 

Farm 
Products. 

North  Carolina 

28 

$2,766,000 

$4,869,968 

$6,432,705 

$50,070,530 

South  Carolina 

15 

1,848,000 

3,744,481 

5,856,344 

51,337,985 

Georgia  . 

28 

4,016,000 

6,634,493 

8,925,609 

83,371,482 

Florida   . 

17 

1,350,000 

3,911,651 

3,567,624 

12,086,330 

Alabama 

27 

3,405,000 

5,727,797 

6,417,525 

66,240,190 

Mississippi 

10 

855,000 

2,032,424 

2,034,329 

73,342,995 

Arkansas 

9 

1,220,000 

1,661,422 

2,355,437 

53,128,155 

Total  .     . 

134 

15,460,000 

28,582,236 

35,589,573 

389,577,667 

Average  . 

19 

2,208,571 

4,083,176 

5,084,224 

55,653,952 

This  table  shows  that  business  in  these  seven 
States  must  be  much  restricted  for  want  of  bank- 
ing facilities,  and  could  be  enlarged  with  entire 
safety. 

ANNUAL    FAKM     PRODUCTS    TEN     TIMES     BANK 

DISCOUNTS. 

That  the  legitimate  loans  and  discounts  in  these 
seven  States  are  well  secured  admits  of  little  ques- 
tion when  it  is  seen  that  the  average  farm  products 
are  each  year  ten  times  the  total  amount  of  the  loans 
and  discounts  made  by  the  national  banks  in  those 
States.  Paper  that  is  issued  to  bring  cotton  to 
market  is  as  good  as  any  other  kind.  It  would 
form  the  best  basis  for  local  issues  of  currency 
when  pledged  with  a  state  clearing  house  as 
trustee  for  the  public.  It  would  be  imposing  no 
onerous  condition  on  the  banks  of  the  country  to 
oblige  them  to  accept  currency  so  secured  at  any 


IN  A   BAD    YEAR  83 

clearing  house  in  the  land,  and  every  banker 
would  know  that  losses  to  the  banks  on  such  cur- 
rency would  be  well-nigh  impossible. 

The  security  which  would  be  offered  at  clearing 
house  would  be  the  choice  of  all  the  best  assets  of 
each  applying  bank.  The  currency  issued  would 
therefore  be  based  on  the  best  business  obligations 
of  the  country. 

If,  however,  the  banks  in  these  States  were  al- 
lowed to  issue  currency  on  their  own  judgment,  in 
their  own  back  parlors,  without  supervision,  and 
hold  the  security  themselves,  the  way  would  be 
opened  for  a  repetition  of  the  disasters  of  1837 
which  were  produced  by  that  style  of  banking. 

HOW   WOULD    THE    SYSTEM   WORK    IN    A    BAD 

YEAR? 

We  know  from  experience  what  the  results  have 
been  of  the  present  national  banking  system  dur- 
ing the  good  and  bad  years  since  its  inauguration. 
We  know  the  results  of  banking  under  the  com- 
petitive system  of  individual  bank  liability  for  an 
unsecured  circulation  which  prevailed  in  this  coun- 
try in  1837.  We  know  also  the  results  of  the 
systems  which  have  prevailed  in  France,  Germany, 
and  England  during  the  past  twenty-five  years. 
But  it  may  be  claimed  that  our  country  presents 
special  difficulties  for  the  establishment  of  any  new 
system,  and  it  is  right  to  inquire  how  the  system 
of  incorporated  clearing  houses  with  special  powers 
to  issue  a  clearing  house  circulation  would  have 
operated  during  some  of  the  bad  years  we  have 


84  PRACTICAL  DIFFICULTIES 

lately  experienced.  It  may  be  well  to  endeavor  to 
answer  this  question,  and,  for  an  example,  take  the 
year  1893,  and  endeavor  to  analyze  the  national 
bank  failures  of  that  year. 

BAD    YEARS    WOULD    BE   LESS    FREQUENT. 

First  it  must  be  evident  that  with  a  system  of 
incorporated  clearing  houses,  and  a  reserve  of 
$600,000,000,  or  the  par  of  the  total  banking  capi- 
tal of  the  nation,  the  panic  of  1893  could  not  have 
swept  the  country  as  it  did.  There  is  no  mystery 
about  that  panic,  for  it  was  simply  the  operation 
of  competitive  banking  with  a  small  reserve. 
Banks  and  individuals  all  over  the  country  began 
to  strengthen  themselves  by  accumulating  a  larger 
supply  of  gold  and  legal  tenders  when  they  saw 
the  reserves  diminishing.  As  the  supply  vanished 
the  demand  grew  stronger  for  the  restoration  of 
reserves,  and  it  only  abated  when  enough  good 
business  had  been  closed  out  and  destroyed  to  pile 
up  a  large  supply  of  idle  currency  in  the  banks. 
Such  a  panic  strikes  the  country  like  a  squall,  and 
there  is  no  time  to  make  new  provision ;  reliance 
can  only  be  had  on  past  accumulations. 

BANK   FAILURES   IN   1893. 

The  Comptroller  of  the  Currency  reports  69 
national  banks  for  which  receivers  were  appointed 
during  the  year  1893  in  25  States  and  1  Terri- 
tory. 

Of  the  25  States,  14  were  Bryan  witli  46  banks, 
11  McKinley  with  22  banks.  Of  the  46  banks,  9 


1'AILURES   CLASSIFIED  85 

were  restored  to  solvency,  and  of  the  22,  2,  leaving 
37  Bryan  banks  and  20  McKinley. 

OUTCOME    OF    SUSPENDED    BANKS. 

Of  the  69  suspended  banks,  in  addition  to  the 
11  which  were  restored  to  solvency  without  admin- 
istration by  the  receiver,  there  were  6  which  paid 
in  full  without  assessment  on  the  stockholders. 
Three  more  paid  in  full  with  only  a  small  stock 
assessment.  Here  are  20  banks,  almost  one  third 
of  the  failures  whose  subsequent  history  proves 
that  if  a  system  had  then  been  in  operation  by 
which  they  could  have  had  temporary  assistance, 
they  would  not  have  been  obliged  to  fail.  While 
we  are  seeking  to  encourage  the  establishment  of 
new  banks,  is  it  not  a  better  policy  to  save  and 
protect  those  we  have  ?  There  is  a  second  class  of 
these  banks,  13  in  number,  which  have  paid  divi- 
dends from  60  to  100  per  cent.,  and  have  assets 
remaining  which  in  some  cases  may  yield  enough 
to  pay  out  nearly,  if  not  quite  in  full. 

There  are  36  banks  more  which  have  paid  only 
from  10  to  60  per  cent,  with  not  much  promise 
for  the  future,  though  the  nominal  assets  in  some 
instances  are  large. 

The  69  failed  national  banks  of  1893  may  be 
listed  thus  :  — 


86  PRACTICAL  DIFFICULTIES 


TABLE  IX. 

Suspended  National  Banks  of  1893. 
11  banks  restored  to  solvency, 
6         "      paid  in  full  without  assessment. 

3  "     "     "     with  slight     " 

20  banks  which  needed  slight  assistance. 

2  banks  which  have  paid   90  to  100%. 

4  "  80  to  90%. 

3  "        "  "       70  to  80%. 

4  60  to  70%. 

13  banks  with  considerable  remaining  assets. 

15  banks  which  have  paid  50  to  60%. 
3  "  "     40  to  50%. 

8  "    30  to  40%. 

5  "          "         "        "    20  to  30   . 
5      "  "    10  to  20  . 

36  banks  without  much  future  prospects. 

69  total  number  of  national  banks  failed  in  1893. 

The  record  of  the  national  banks  for  1893  is  no 
doubt  about  the  same  as  we  would  find  to  be  true 
as  regards  .state  banks  and  trust  companies,  and 
many  private  firms ;  that  is,  that  slight  additional 
assistance  at  the  critical  point  would  have  stayed 
the  ravages  of  the  panic  and  saved  the  country 
untold  losses,  and  probably  prevented  one  half  or 
more  of  the  failures. 

LOANS   TO    SOME    OF    THESE     BANKS    COULD    HAVE 
BEEN    MADE    SAFELY. 

The  remaining  question  is  whether  this  could 
have  been  done  with  entire  safety  to  those  advan- 
cing the  credit. 


A   SALUTARY  PROCESS  87 

This  question  must  be  answered  in  the  affirma- 
tive if  the  advances  had  been  made  by  experienced 
bankers,  acquainted  with  the  concerns  applying  for 
aid  and  with  the  collateral  security  they  offered, 
and  who  themselves  were  interested  in  avoiding  a 
loss  on  the  advances.  If  a  loan  committee  is  to 
pass  upon  the  sufficiency  of  the  collateral,  and  the 
members  of  that  committee  are  stockholders  in 
banks  connected  with  the  clearing  house  for  which 
they  are  acting,  and  their  banks  have  a  proportion- 
ate liability  for  any  loss  which  may  result  from 
such  loans,  it  may  be  safely  assumed  that  they 
will  see  to  it  that  the  security  is  good  and  ample, 
and  losses  may  be  as  rare  as  they  have  been  on 
clearing  house  certificates.  Members  of  a  bank 

O 

committee  are  specially  trained  for  that  work.  The 
effect  of  this  supervision  would  be  most  salutary 
on  the  banks,  for  in  order  to  be  able  to  obtain 
advances  from  the  clearing  house,  their  notes  and 
collateral  securities  must  be  of  a  high  class.  Many 
a  bank  would  be  restrained  from  taking  certain 
low  grades  of  paper  if  it  was  known  they  would 
not  pass  at  the  clearing  house.  The  whole  fabric 
of  banking  assets  would  be  improved,  and  the 
entire  method  of  banking  would  be  made  more 
conservative,  as  it  has  been  in  France,  by  the  su- 
pervision which  would  thus  be  established  in  the 
clearing  houses. 

O 

That  advances  to  these  69  banks  which  failed  in 
1893  could  have  been  made  safely  is  shown  by  the 
amount  of  cash  collected  from  their  assets. 


88  PRACTICAL   DIFFICULTIES 

TABLE  X. 

Cash  Collections  of  Suspended  Banks. 

The  total  capital  of  these  69  banks  was     .     .     .$11,520,000 
Deduct  capital  of  11  banks  restored  to  solvency         1,725,000 


Total  capital  of  banks  administered  by  receivers  9,795,000 
There  has  been  collected  in  cash  from  the  assets 

of  these  banks 11,087,491 

And  there  are  remaining1  in  hands  of  receivers 

nominal  assets  amounting  to  about      ....     13,000,000 

This  statement  shows  that  if  ordinary  prudence 
had  been  exercised,  loans  to  these  failed  banks  on 
their  assets  would  not  have  resulted  in  loss  to  those 
who  might  have  advanced  them  credit  to  an  amount 
not  more  than  their  capital  stock. 

Under  the  German  system  it  must  be  especially 
noticed  that  the  privilege  to  issue  an  emergency 
currency  is  only  conferred  on  a  few  large  banks. 
It  would  be  dangerous  in  the  extreme  to  confer  it 
in  our  country  on  small  clearing  houses  generally. 
There  must  be  some  combination  of  banks  to  pro- 
duce the  responsibility  which  can  be  compared  with 
that  of  the  Imperial  Bank.  This  it  is  proposed 
to  accomplish  by  conferring  the  control  of  cur- 
rency issues  upon  one  clearing  house  in  each  State 
or  on  any  making  clearings  of  over  f  200,000,000 
annually., 

REDEMPTION. 

The  burden  of  the  redemption  of  the  currency 
is  placed  upon  the  clearing  houses.  If  the  public 
should  desire  to  collect  any  of  these  notes,  they 
need  only  to  deposit  them  in  any  bank,  and  the 


CAN  ELASTICITY  RE  ATTAINED          89 

cash  would  stand  at  their  credit.  If  the  notes 
should  accumulate  at  any  centre,  the  banks  would 

V 

sort  and  collect  them  as  any  other  drafts.  The 
public  would  not  be  interested  in  the  arrangement 
which  banks  and  clearing  houses  might  make  be- 
tween themselves  for  such  collections.  The  mode 
of  collection  through  any  clearing  house  is  sum- 
mary. Payment  of  the  notes  on  demand  is  indis- 
pensable to  restrain  the  issues  and  keep  them 
always  on  a  cash  basis. 

ELASTICITY. 

It  is  sometimes  said  that  elasticity  cannot  be  at- 
tained with  a  secured  currency.  A  currency  may 
be  secured  by  pledge  with  a  trustee  of  either  bonds 
or  bank  assets.  The  national  bank  currency  is  a 
type  of  one  class,  and  New  York  clearing  house 
certificates  are  a  type  of  the  other. 

CAN   ELASTICITY    BE   ATTAINED   WITH   A    SECURED 

CURRENCY  ? 

The  general  statement  that  elasticity  cannot  be 
attained  with  a  secured  currency  is  based  upon  an 
experience  with  a  bond-security  purchased  for  the 
sake  of  taking  out  currency,  and  it  is  true  as  far  as 
it  applies  to  that.  Lack  of  elasticity  in  a  bond- 
secured  currency  has  been  noticed  ever  since  the 
enactment  of  the  New  York  free  banking  law  of 
1838.  Inelasticity  was  the  cause  of  the  first  issue 
of  clearing  house  certificates  in  1857,  which  were 
elastic  because  secured  by  bank  assets.  When  the 
National  Currency  Act  was  passed  in  1863,  the  chief 


90  PRACTICAL   DIFFICULTIES 

criticism  then  was  that  currency  so  issued  must  be 
inelastic.  The  criticism  is  as  old  as  a  bond-secured 
currency,  has  never  been  denied,  and  must  be  ac- 
cepted as  true. 

CURRENCY   ELASTIC   WHEN    SECURED   BY   BANK 

ASSETS. 

But  it  is  not  true  of  a  currency  issued  on  pledge 
of  the  assets  of  a  bank,  its  bills  receivable,  and 
other  securities  taken  in  the  ordinary  course  of 
commercial  business.  An  issue  of  currency  secured 
by  these  assets  would  be  put  out  to  meet  the  de- 
mands of  depositors,  or  to  furnish  discounts  in 
excess  of  the  loanable  funds  of  the  bank.  If  the 
funds  of  the  bank  are  first  loaned  to  regular  cus- 
tomers, and  thereafter,  when  money  becomes  active, 
the  assets  thus  accumulated  are  pledged  to  secure 
currency,  then  the  funds  of  the  bank  are  released 
to  be  loaned  again.  When  the  demand  is  over, 
and  deposits  return,  and  the  discounts  are  paid, 
then  the  bank  would  return  its  currency  and  take 
up  its  collateral.  This  expansion  and  contraction 
is  called  elasticity,  and  it  can  as  well  be  obtained 
under  a  trusteeship  as  if  the  banks  should  issue 
the  currency  and  hold  the  security  themselves. 

DIFFERENCE    BETWEEN    BOND    AND    ASSET 

SECURITY. 

The  nature  of  the  two  transactions  involved  in 
the  issue  of  currency  on  bonds  on  the  one  hand, 
or  on  bank  assets  on  the  other,  is  different.  The 
first  is  an  investment  of  a  margin  of  money  in  the 


CURRENCY  BASED   ON  BONDS  91 

purchase  of  bonds,  to  be  lodged  as  security  for 
currency,  for  the  sake  of  the  profit  in  the  opera- 
tion. The  transaction  is  one  more  loan  or  invest- 
ment of  the  funds  of  the  bank.  The  investment 
in  the  margin  pays  a  certain  profit,  and  if  that 
profit  is  above  the  rate  of  interest  at  which  money 
can  be  loaned  by  the  bank,  the  bank  will  take  out 

«/ 

currency  liberally.  If  it  is  below  that  rate,  then 
the  bank  will  take  out  only  the  minimum  amount 
required  by  law. 

If  a  bank  has  taken  out  currency  on  an  easy 
money  market,  and  rates  afterwards  advance  so 
that  taking  currency  becomes  less  profitable  than 
loaning  the  margin,  then  if  the  bank  can  sell  its 
deposited  bonds  without  loss,  it  would  be  inclined 
to  do  so.  With  the  proceeds  it  would  retire  its 
currency,  and  lend  to  its  customers  the  margin 
thus  released.  So  we  should  have  the  paradoxical 
state  of  affairs  under  a  system  of  currency  secured 
by  bonds,  that  banks  might  retire  their  currency 
on  a  close  money  market  in  order  to  increase  their 
loanable  funds.  This  is  creating  more  money  by 
contracting  the  amount  in  circulation.  This  con- 
traction would  take  place  when  the  banks  could 
accommodate  their  customers  better  and  make 
more  profit  to  themselves  by  lending  the  capital 
direct,  instead  of  using  it  as  margin  on  a  purchase 
of  bonds. 


92  PRACTICAL  DIFFICULTIES 

CURRENCY    SECURED   BY    BONDS    OF   LITTLE 

SERVICE. 

There  is  a  difficulty  which  is  almost  insurmount- 
able in  making  of  any  service  to  the  commercial 
community  a  currency  which  is  obtained  on  bonds. 
This  lack  of  elasticity  has  been  commented  on  in 
every  panic  since  1857.  In  the  worst  of  the  panic 
of  1898  the  benefit  derived  from  national  bank 
currency  was  almost  nothing.1  This  is  because  the 
owners  of  United  States  bonds  are  not  the  class  in 
need  of  assistance,  and  even  in  a  period  of  extreme 
stringency  arrangements  can  hardly  be  made  by 
commercial  banks  to  obtain  bonds  to  be  pledged 
for  currency  and  at  the  same  time  retain  the  cur- 
rency for  the  benefit  of  their  commercial  customers. 
Currency  obtained  on  bonds  has  nothing  to  do  with 
the  commercial  business  of  the  bank,  which  is 
rigidly  confined  to  its  actual  loanable  cash. 

The  two  transactions  show  that  a  secured  cur- 
rency may  be  either  elastic  or  rigid.  A  bond- 
security  necessarily  produces  an  inelastic  currency, 
and  bank  assets  produce  an  elastic  currency, 
whether  held  by  the  bank  or  pledged  with  a 
trustee.  So  it  must  be  allowed  that  elasticity  can 
be  attained  with  a  currency  secured  by  property 
in  the  hands  of  a  trustee,  provided  the  property  is 
convertible  bank  assets.  The  elasticity  is  due  to 
the  difference  in  the  security  and  not  to  the  dif- 
ference in  its  custodian. 

1  On  this  point,  see  Appendix,  p.  226. 


INTERESTED  PARTIES  93 

BANKS    CANNOT    UNITE    ON    A    PLAN   FOR   A   NEW 

SYSTEM. 

While  there  exists  a  widespread  desire  for  a 
reformation  of  our  financial  system,  it  is  a  remark- 
able fact  that  banks  as  a  class  have  no  measure 
which  they  are  united  in  advocating.  They  at- 
tempted to  formulate  such  a  measure  when  they 
prepared  what  is  known  as  the  Baltimore  plan,  but 
when  that  was  put  into  shape,  the  banks  almost 
unanimously  abandoned  it.  It  would  be  supposed 
at  first  sight  that  the  officers  of  banks,  who  have 
a  daily  experience  in  bank  management,  would  be 
especially  acquainted  with  the  defects  of  the  exist- 
ing system,  and  would  be  well  qualified  to  suggest 
remedies. 

One  reason  for  their  failure  to  do  so  is  that  in 
the  ordinary  daily  routine  the  existing  system 
works  well.  Business  can  be  conducted  under  it 
with  satisfaction  to  the  stockholders  and  customers. 
Panics  arise  from  difficulties  with  which  a  local 
bank  has  nothing  to  do  ;  they  belong  to  a  range  of 
questions  that  lie  beyond  its  daily  routine,  and  the 
local  officer  feels  he  is  not  in  a  position  to  grasp 
and  systematize  the  factors  of  the  problem.  He 
therefore  contentedly  settles  down  to  his  work  and 
leaves  the  whole  subject  to  others  who  are,  he 
thinks,  in  a  better  position  than  he  to  deal  with  it. 

Another  reason  is  that  he  says  in  effect,  Prepare 
your  new  system,  and  if  I  like  it  I  will  conform 
to  it ;  if  not,  I  have  the  option  of  retiring  from  the 
business.  This  is  a  reasonable  position,  and  per- 


94  PRACTICAL  DIFFICULTIES 

haps  is  the  one  most  commonly  taken.  The  officers 
of  to-day  had  no  voice  in  the  formation  of  the  pre- 
sent system,  and  are  now  working  under  it  only 
as  a  way  of  making  money.  They  are  interested 
parties,  and  the  suggestions  of  changes  they  might 
make  would  only  be  in  the  direction  of  making  the 
system  more  profitable  to  the  banks,  not  more  ser- 
viceable to  the  public.  Their  chief  object  is  not  to 
prevent  panics  and  save  the  commercial  community 
from  losses,  but  to  take  care  of  their  own  interests, 
assuming  that  the  parties  of  the  second  part  will 
take  care  of  their  side  of  the  bargain.  They  there- 
fore see  the  propriety  of  referring  to  Congress 
the  reconstruction  of  the  system,  and  they  content 
themselves  with  their  power  of  choice  if  any  new 
provisions  are  deemed  onerous. 

Another  reason  for  failure  is  the  diversity  of 
political  opinions  among  bankers  which  prevents 
them  from  union  upon  a  plan.  The  great  division 
is  into  Republicans  and  Democrats,  -  -  the  one  sus- 
taining a  national  system,  under  a  general  federal 
law ;  the  other  preferring  a  state  system,  under 
special  charters.  It  has  been  said  that  it  is  as  in- 
correct to  speak  of  Republican  and  Democratic 
money  as  of  Republican  or  Democratic  potatoes. 
Political  history,  however,  shows  that  such  a  differ- 
ence exists.  The  whole  current  of  Republican 
legislation  on  banking  has  led  up  to  and  ends  in 
the  national  banking  system,  with  its  general  laws, 
governmental  supervision,  statistical  reports,  and 
security  for  circulation  in  the  hands  of  a  trustee, 
that  is,  government  bonds  pledged  with  the  trea- 


CLASSES   OF  BANKERS  95 

surer  of  the  United  States  in  trust.  This  is  a 
development  of  banking  which  is  one  of  the  great- 
est glories  of  republican  institutions,  the  like  of 
which  is  not  seen  in  any  other  country.  Demo- 
cratic legislation  has  ended  in  the  state  system, 
with  special  charters,  and  no  trusteeship  for  the 
currency.  There  is,  therefore,  a  radical  difference 
between  Republican  and  Democratic  money,  and 
bank  officers  belonging  to  these  parties  cannot 
unite  upon  a  common  plan. 

Another  division  of  bankers  is  formed  by  those 
who  have  received  their  education  in  other  coun- 
tries, or  who  are  enamored  of  English  and  other 
precedents,  and  who  advocate  foreign  systems  as 
the  only  true  sources  of  relief.  They  can  hardly 
conceal  their  contempt  for  American  banking,  and 
suggest  systems  of  branch  banks  dominated  by  a 
parent  institution  with  overshadowing  capital,  or 
the  revival  of  the  Bank  of  the  United  States  in 
some  form.  The  supporters  of  these  plans  ignore 
our  political  divisions  into  separate  States,  and 
sometimes  traduce  the  memory  of  Andrew  Jackson 
for  having  overthrown  the  United  States  Bank,  the 
only  effect  of  which  is  to  place  themselves  outside 
of  the  discussion.  These  many  political  differ- 
ences necessarily  prevent  united  action  on  the  part 
of  banks. 

CHANGES    MUST   BE   MADE    BY   CONGRESS. 

The  changes  in  our  system  must  be  made  by 
Congress,  which  holds  the  constitutional  power  to 
pass  laws  regulating  the  currency.  In  Congress  is 


96  PRACTICAL  DIFFICULTIES 

the  arena  where  all  parties,  all  financial  interests, 
and  all  theories  can  meet  in  open  discussion,  and 
there  the  question  must  be  decided. 

Banking  must  be  brought  to  conform  to  our 
political  system.  It  is  not  only  a  matter  of  busi- 
ness. Congress  occupies  the  position  of  arbitrator 
between  the  banks  and  the  business  community, 
both  of  which  parties  are  to  receive  full  considera- 
tion and  neither  of  them  to  be  ignored.  But  above 
all,  fidelity  to  the  principles  on  which  our  govern- 
ment is  established  must  be  jealously  maintained. 

CONCLUSION. 

We  have  now  finished  the  attempt  to  present  the 
argument  in  support  of  the  position  that  a  system 
of  clearing  houses  incorporated  under  federal  law, 
with  power  to  issue  currency  on  pledge  of  collat- 
eral by  their  members,  would  protect  the  commer- 
cial community  from  panic  and  provide  whatever 
money  is  needed  for  legitimate  business.  This  is 
all  that  the  commercial  community  want  of  a  bank- 
ing system.  It  can  also  be  claimed  that  under  the 
supervision  of  loan  committees,  the  chance  of  loss 
to  the  banks  of  the  remaining  States,  resulting  from 
injudicious  loans  sufficient  to  extinguish  all  the 
banking  capital  of  a  single  State,  would  be  small 
enough  to  be  ignored.  The  practical  result  would 
no  doubt  be  that  very  little  clearing  house  currency 
would  be  issued,  and  that  hereafter  banking  would 
be  conducted  with  little  disturbance,  and  interest 
charges  would  be  more  regular  and  uniform.  The 
banks  would  keep  in  reserve  the  power  to  issue 


THE  ESSENTIAL  INTERESTS  97 

clearing  house  currency,  and  that  reserve  would 
maintain  tranquillity,  and  support  and  protect  com- 
mercial credit. 

It  has  come  to  be  an  axiom  among  bankers  in 
Europe  and  this  country,  that  the  safest  use  of 
money  is  in  re-discounting  bank's  bills-receivable 
taken  in  the  ordinary  course  of  business,  with  the 
indorsement  of  the  bank  added  thereto.  This  is 
the  kind  of  loans  the  clearing  houses  would  accept, 
and  in  the  estimation  of  bankers  such  loans  would 
be  considered  the  best  that  could  be  made.  They 
would  be  based  upon  the  choicest  and  strongest 
paper  in  the  portfolios  of  the  banks. 

It  is  with  the  United  States  now,  as  it  was  with 
France  in  1847,  that  "  the  essential  interests  of  the 
country  imperiously  demand  that  every  bank  bill 
declared  to  be  lawful  money  shall  be  able  to  circu- 
late equally  in  all  parts  of  the  land." 

The  same  thought  was  forcibly  expressed  ten 
years  before  by  Daniel  Webster,  when  he  said  in 
his  speech  delivered  September  28, 1837,  "  I  am  of 
opinion,  sir,  that  we  want  paper  of  universal  credit, 
and  which  is  convertible  into  specie  at  the  will  of 
the  holder." 

This  result  can  be  reached  by  establishing  a  trus- 
teeship for  the  public  to  pass  upon  and  hold  the 
security  for  the  currency  issued,  and  no  agency  can 
be  better  suited  to  this  work  than  clearing  houses 
incorporated  under  federal  law. 


X 

STATEMENT 

MADE  BEFORE  SUB-COMMITTEE  NO.  2  OF  THE  COMMITTEE 
ON  BANKING  AND  CURRENCY,  ON  THE  BILL  (H.  R. 
3338)  TO  INCORPORATE  CLEARING  HOUSES  AND  PRO- 
VIDE CLEARING  HOUSE  CURRENCY,  ETC.  (FROM  THE 
RECORDS  OF  THE  COMMITTEE.) 

Thursday,  February  20,  1896. 

THE  sub-committee  met  at  10.30  A.  M.  There 
were  present  Messrs.  Brosius  (chairman),  Hill,  and 
Cobb  of  Missouri. 

Mr.  Theodore  Gilman,  of  New  York  city,  was  in- 
troduced and  made  the  following  statement :  — 

STATEMENT. 

MR.  CHAIRMAN  AND  GENTLEMEN:  The  first 
stated  object  of  the  bill  is  "  to  protect  and  support 
commercial  credit,  and  to  equalize  rates  of  inter- 
est," and  it  provides  in  its  first  section  for  the  in- 
corporation of  individual  banks  into  clearing  house 
associations. 

The  theory  of  the  bill  is  that  the  absence  of  a 
means  of  supporting  credit  is  inherent  in  a  system 
like  that  at  present  existing  in  our  country,  which 
provides  only  for  the  incorporation  of  individual 
banks,  and  stops  there. 


NATIONAL  BANKING  SYSTEM  99 

The  organization  of  individual  banks  forms  the 
basis  of  a  system,  but  if  the  banks  are  not  organ- 
ized with  relations  to  each  other,  it  is  a  misnomer 
to  call  it  a  system ;  it  is  only  an  agglomeration. 
Individual  banks  are  organized  under  the  national 
currency  act  on  an  independent  basis,  and  are  em- 
powered to  take  care  of  themselves  and  their  cus- 
tomers. They  are  competitive  and  not  mutually 
supporting  ;  each  one  is  a  unit  and  autonomous, 
like  a  petty  principality. 

We  use  the  term  "  national  banking  system  "  to 
describe  the  4,000  separate  banks  which  are  organ- 
ized under  the  National  Currency  Act  of  1863.  But 
do  they  form  a  system  in  the  sense  in  which  we  use 
that  word  to  describe  systems  of  which  the  ex- 
ecutive, legislative,  and  judicial  branches  of  the 
government  are  examples?  Lower  and  higher 
officials,  elective  bodies,  and  courts  make  up  the 
gradations  of  these  systems. 

THE    OPERATION    OF    BANKING. 

It  is  evident  that  a  national  bank  does  not  cover 
the  whole  .operation  of  banking  from  the  creation 
of  debits  and  credits  to  their  final  extinction.  The 
beginning  of  the  operation  is  in  a  bank,  and  it  is 
concluded  in  a  clearing  house.  The  enormous 
amount  of  clearings,  aggregating  fifty  thousand 
millions  annually,  show  the  importance  of  their 
functions  from  a  money  standpoint.  But  their  ser- 
vices cannot  be  even  thus  limited,  for  they  provide 
the  daily  test  of  the  solvency  of  every  bank  and 
business  man  in  the  country ;  they  provide  a  bar- 


100     STATEMENT  BEFORE  SUB-COMMITTEE 

ometer  of  the  state  of  credit  and  the  movements 
of  currency,  and  are  the  only  places  where  individ- 
ual banks  are  brought  together  and  where  united 
action  can  be  secured. 

Out  of  these  conditions  comes  the  necessity  of 
mutual  agreements  and  regulations  for  the  govern- 
ment of  the  business  to  be  transacted,  and  for  the 
protection  of  the  banks  associated  in  the  clearing 
house.  The  clearing  house  must  have  its  articles 
of  association  or  incorporation  under  the  laws  of 
the  different  States,  its  officers  and  committees, 
and  their  duties  must  be  clearly  defined.  For  the 
protection  of  the  associated  banks  there  must  re- 
side somewhere  the  right  and  duty  to  inspect  the 
affairs  of  any  of  their  number,  and  even  to  suspend 
one  from  its  privileges  on  specified  proofs  and 
charges.  These  are  powers  in  which  not  only  the 
associated  banks  are  interested,  as  the  representa- 
tives of  their  many  stockholders,  but  also  all  the 
customers  of  each  bank,  and  the  ramifications  of 
these  interests  in  every  clearing  house  as  at  pre- 
sent constituted  stretch  far  and  wide  over  the  whole 
country.  The  organization  and  regulations  of 
clearing  houses  become,  therefore,  matters  in  which 
the  entire  country  is  interested,  and  in  times  of 
commercial  disturbance  this  becomes  evident  be- 
yond question.  At  such  times  the  most  delicate 
questions  are  brought  before  clearing  houses  for 
their  decision,  and  the  wisdom  of  experienced  bank- 
ers has  then  the  opportunity  to  render  important 
service  in  staying  incipient  panic  and  in  carrying 
houses  and  banks  over  difficulties  that  are  never 
known  outside  of  banking  circles. 


A   GLANCE  AT  OUR  SYSTEM          101 
THE   PART   OF   CLEARING    HOUSES   IN   BANKING. 

The  banking  system,  therefore,  must  be  consid- 
ered to  include  not  only  banks  but  clearing  houses 
as  well,  and  though  these  latter  play  such  an  impor- 
tant part  in  the  banking  operations  of  the  country, 
they  are  not  a  part  of  the  national  banking  system, 
and  are  not  under  governmental  supervision.  The 
question  arises,  Can  the  national  system  be  consid- 
ered complete  until  clearing  houses  are  incorporated 
in  it  under  United  States  laws  and  government 
supervision  ?  To  answer  this  question  intelligently 
we  must  then  take  a  glance  at  our  national  banking 
system  and  inquire  what  are  its  chief  distinguishing 
characteristics,  not  only  at  home,  but  as  compared 
with  the  systems  of  other  nations. 

It  is  a  remarkable  political  fact,  and  one  which 
we  do  not  always  fully  appreciate  or  give  suffi- 
cient weight  to,  that  the  United  States  stands  alone 
among  the  nations  of  the  earth  in  having  a  national 
system  of  banking  based  upon  a  general  law.  This 
situation  has  been  reached  as  the  outgrowth  of 
American  institutions,  and  as  the  result  of  political 
and  financial  discussions  and  campaigns  conducted 
with  intense  excitement  011  the  one  hand,  and  ac- 
knowledged ability  on  the  other.  Now  it  must  be 
received  as  the  first  article  of  our  financial  creed, 
universally  accepted  as  republican  dogma,  that 
banking  in  this  country  must  be  done  under  a  gen- 
eral law. 


102     S  TA  TEMENT  BEFORE  S  UB-COMMITTEE 

PURPOSE   AND   EFFECT   OF   A   GENERAL    BANKING 

LAW. 

The  underlying  purpose  of  a  general  banking 
law  is  to  form  banks  for  the  benefit  of  the  people, 
and  to  make  all  the  advantages  of  the  law  free  to 
any  who  comply  with  its  conditions. 

The  chief  effect  of  a  general  law  is  to  create  a 
large  number  of  individual  banks  of  moderate  cap- 
ital in  all  parts  of  the  country.  Banks  of  great 
capital,  sufficient  to  give  a  world-wide  credit,  or 
to  enable  them  to  establish  branches  in  this  and 
other  countries,  and  to  issue  currency  on  their  own 
credit,  are  not  contemplated  by  a  general  law. 
Such  banks  must  have  special  charters  and  be  to 
some  extent  monopolies.  They  are  conducted  for 
the  privileged  owners  and  not  for  the  people. 

In  a  banking  system  composed  of  4,000  individ- 
ual banks  of  equal  standing  and  moderate  capital, 
there  must  be  found  some  substitute  for  the  great 
banks  of  other  countries,  like  the  Bank  of  England 
or  the  Bank  of  France.  That  these  from  their 
central  position  and  commanding  capital  give  a 
steadiness  to  the  financial  affairs  of  their  countries, 
and  that  it  would  be  a  benefit  for  our  finances  to 
be  steadied  in  the  same  wav,  cannot  be  denied. 

\t    * 

Our  people  will,  however,  neither  renounce  their 
approval  of  general  laws,  nor  their  disapproval  of  a 
governmental  bank.  This  great  need  of  a  balance- 
wheel  in  our  financial  system  can  be  met  in  entire 
harmony  with  republican  institutions  by  another 
general  law  which  will  provide  for  the  incorpora- 


A   BALANCE-WHEEL  103 

tion  of  associated  and  adjacent  banks  in  clearing 
house  associations,  as  provided  in  the  bill  before 
us.  By  means  of  the  provisions  which  can  be  in- 
corporated in  a  general  law,  the  defect  of  the  lack 
of  commanding  capital  may  be  obviated,  and  all 
the  advantages  secured  which  large  resources  bring, 
not  only  for  the  transaction  of  current  business, 
but  for  special  emergencies,  when  united  action 
would  be  desired  to  preserve  the  stability  of  the 
financial  situation. 

The  advantages  resulting  from  the  joint  action 
of  banks  may  be  seen  in  the  union  of  those  of 
Great  Britain  in  the  crisis  of  1890,  when  by  con- 
certed action  they  formed  a  guarantee  fund  of 
X15,000,000  to  save  the  Barings  from  suspension. 
By  this  magnificent  energy  a  panic  was  avoided 
which  the  Bank  of  England  was  utterly  unable  to 
meet  alone.  Among  MacLeod's  reflections  on  this 
subject  is  the  following :  "  To  meet  such  tremen- 
dous crises,  as  all  future  ones  will  be,  the  Bank 
of  England  must  act  together  with  all  the  other 
banks  in  the  country  to  support  the  commercial 
community." 

CLEARING   HOUSE    CERTIFICATES    OF   1893. 

The  united  action  of  the  banks  composing  the 
clearing  house  of  New  York  in  1857,  1860,  and 
1861,  and  at  various  times  since  then,  by  the  issue 
of  clearing  house  certificates,  of  which  the  last 
familiar  instance  was  in  1893,  proved  of  the  great- 
est benefit,  not  only  to  New  York,  but  to  all  the 
country.  This  action  was  without  any  special 


104     STATEMENT  BEFORE  SUB-COMMITTEE 

legal  authority,  and  it  is  evident  that  if  our  clear- 
ing houses  are  incorporated  under  a  general  law, 
and  made  part  of  our  banking  system,  we  would 
have  the  machinery  ready  for  action  all  over  the 
country  to  meet  any  financial  crisis,  and  that  not  a 
day's  delay  need  occur  before  it  is  announced  that 
adequate  provisions  have  already  been  made  for 
any  emergency.  The  united  action  of  the  associated 
banks  of  the  United  States  through  their  clearing 
houses  would  establish  credit,  and  this  resource 
would  always  be  at  hand  if  the  clearing  houses 
were  incorporated  into  our  banking  system  by  act 
of  Congress.  It  is  to  Congress  that  the  country 
must  look  for  appropriate  legislation  to  include  all 
banking  operations  under  government  supervision, 
so  that,  in  fact  as  well  as  in  name,  we  shall  have  a 
national  banking  system. 

Republican  ideas  have  thus  far  controlled  the 
development  of  our  banking  system.  Under  the 
guidance  of  the  principles  contained  in  the  Decla- 
ration of  Independence  the  monetary  system  of  the 
United  States  has  reached  a  point  which  is  in  cer- 
tain particulars  in  advance  of  that  of  any  other 
nation  in  the  world.  In  the  characteristics  of  eren- 

o 

eral  banking  laws,  and  in  governmental  inspection 
and  uniform  and  complete  statistical  reports,  no 
other  country  has  reached  our  degree  of  theoretical 
advance.  We  need  but  to  add  the  capstone  of 
association  under  a  general  law  with  governmental 
supervision  to  make  our  system  not  only  the  best 
in  the  world,  but  the  most  efficient  instrument 
possible  for  the  development  of  the  resources  of 


CREDIT  NOW   UNPROTECTED  105 

our  land.  And  this  last  step  is  preeminently  re- 
publican, for  it  leaves  the  individual  banks  free 
and  independent,  and  yet  organizes  them  into 
strong  bodies  by  means  of  incorporated  clearing 
houses.  A  banking  system  so  formed  would  last 
as  long  as  the  principles  of  representative  govern- 
ment. 

Having  thus  considered  the  incorporation  of 
clearing  houses  under  a  national  law  as  necessary 
to  complete  the  national  banking  system,  we  will 
now  discuss  such  incorporation  as  a  measure  "  to 
protect  and  support  commercial  credit,  and  equal- 
ize rates  of  interest." 

SAFEGUARDS    AGAINST   PANICS. 

A  bill  which  has  this  for  its  first  stated  object, 
not  only  proposes  to  do  that  which  the  entire  busi- 
ness community  must  approve  of,  but  it  implies 
that  commercial  credit  is  now  unprotected  and  un- 
supported, and  that  there  is  need  of  some  addi- 
tional agencies,  other  than  those  at  present  in 
existence,  to  fully  and  perfectly  accomplish  this 
most  devoutly  to  be  desired  result.  The  argument 
on  which  this  bill  is  based  is  so  simple  that  it  can 
be  stated  in  a  single  sentence,  but  the  subject  is  so 
large  that  volumes  could  be  written  in  elucidation 

o 

of  it.  In  a  sentence,  it  is  this :  Panics  or  failures 
of  commercial  credit  come  upon  the  business  com- 
munity with  unwelcome  frequency,  and  an  ample 
safeguard  against  their  destructive  effect  would  be 

o  o 

provided  by  incorporating  clearing  houses  under 
United  States  laws,  with  power  to  issue  currency 


106     STA  TEMENT  BEFORE  SUB-COMMITTEE 

on  pledge  of  convertible  collateral  security  to  banks 
applying  for  such  accommodation.  It  is  evident 
also  that  any  system  that  is  able  to  bear  a  great 
strain  can  with  more  ease  bear  a  lesser,  and  if  the 
system  of  incorporating  clearing  houses  could  avert 
panics,  it  could  also  avert  money  pressures  of  less 
magnitude  and  meet  the  requirements  of  busy  sea- 
sons as  well.  It  would  thus  attain  the  great  desid- 
eratum of  equalizing  rates  of  interest  throughout 
the  year,  and  from  one  end  of  the  country  to  the 
other,  so  that  business  men  should  not  be  com- 
pelled to  pay  high  rates  of  interest  for  money  only 
because  business  is  brisk,  or  those  in  one  part  of 
the  country  be  compelled  to  pay  a  higher  rate  of 
interest  than  those  living  in  another. 

We  must  here  interject  a  few  general  remarks. 
Bankers,  as  such,  have  onlv  an  indirect  concern  in 

•/ 

the  purchase  and  minting  of  silver  by  the  govern- 
ment, for  they  can  bank  as  well  on  one  basis  as 

«' 

another,  but  they  justly  ask  of  the  government  a 
banking  system  as  nearly  perfect  as  possible.  We 
must  also  separate  the  finances  of  the  government 
from  the  operations  of  commercial  banks  organized 
under  state  and  national  laws.  The  government 
does  not  issue  its  currency  in  accordance  with  the 
National  Banking  Act,  but  on  an  entirely  different 
principle.  All  the  troubles  of  the  government  of 
the  United  States  with  its  currency  could  be  reme- 
died in  one  season  by  the  enactment  of  a  tariff 
which  would  produce  a  revenue  greater  than  the 
expenses. 

Let  us  now  return  from  this  short  digression. 


WHAT  ARE  PANICS?  107 

As  the  lesser  is  contained  in  the  greater,  we  must 
consider,  for  a  proper  understanding  of  the  objects 
of  this  bill,  the  nature  of  the  failures  of  commercial 
credit,  called  panics,  and  the  two  methods  of  their 
cure. 

NATURE   OF   PANICS. 

Panics  are  occasional  failures  of  confidence  and 
are  inseparable  from  an  unprotected  credit  system. 
The  credit  system  may  be  said  to  have  begun  in 
England  by  the  chartering  of  the  Bank  of  England 
in  1694.  Two  years  later  Bank  of  England  notes 
were  at  20  per  cent,  discount,  and  the  bank  stopped 
payment  thereon  in  coin.1  So  it  appears  that  two 
years  after  the  modern  credit  system  was  estab- 
lished there  was  a  failure  of  confidence,  and  we  have 
been  having  a  repetition  of  the  same  experience 
everv  few  years  from  that  time  to  the  present  day. 

The  cause  is  not  far  to  seek.  We  give  credit  to 
an  order  or  promise  to  pay  of  a  government,  indi- 
vidual, corporation,  or  bank.  A  bank  will  print  a 
circulating  note  to  read  :  "  We  promise  to  pay  on 
demand  one  dollar,"  or  will  receive  deposits  and 
promise  to  pay  them  on  demand,  and  if  we  believe 
the  bank  can  and  will  do  as  it  promises  we  give  it 
credit.  But  we  know  all  the  time  that  the  bank 
only  keeps  on  hand  in  cash  25  per  cent,  of  its  pro- 
mises to  pay.  Everybody  knows  that,  but  in  an 
intelligent  community — and  credit  is  only  possible 
in  such  —  the  giving  of  this  credit  is  accepted  and 
recognized  as  reasonable  and  right,  and  the  suffi- 
ciency of  a  reserve  of  25  per  cent,  is  believed  to  be 

1  Adam  Smith,  book  ii.  chap.  ii. 


108     STA  TEMENT  BEFORE  SUB-COMMITTEE 

as  good  for  all  practical  purposes  as  keeping  in 
hand  the  entire  amount. 


DANIEL    WEBSTER    ON    CREDIT. 

Not  only  do  banks  and  governments  promise  to 
pay  money  which  they  have  not  in  hand,  but  all 
business  is  conducted  on  the  principle  of  a  reserve, 
or,  in  other  words,  on  the  credit  system.  The  mer- 
chant, manufacturer,  and  business  men  generally, 
all  promise  to  pay  in  the  future  the  money  pro- 
ceeds of  commodities  which  are  yet  unmanufac- 
tured and  unsold,  and  enough  cash  only  is  kept  on 
hand  to  meet  present  requirements.  By  means  of 
the  credit  system  the  amount  of  business  is  enor- 
mously increased.  "  Credit,"  said  Daniel  Webster, 
"  has  done  more  a  thousand  times  to  enrich  nations 
than  all  the  mines  of  all  the  world." 

But  let  something  unusual  happen,  —  a  war  or 
other  disaster,  —  then  the  insufficiency  of  the  re- 
serve is  brought  to  men's  minds  with  startling 
vividness.  The  credit  vanishes  and  fulfillment  of 
the  obligation  is  demanded. 

O 

SILVER    SCARE    AND    VENEZUELA    MESSAGE    CAUSED 

PANIC. 

A  withdrawal  of  10  per  cent,  of  deposits  is  suffi- 
cient to  throw  the  whole  banking  system  of  the 
country  into  confusion.  In  1884  the  failure  of  the 
Metropolitan  Bank  and  other  circumstances  caused 
such  a  withdrawal  and  the  consequent  panic.  In 
1893  the  i  silver  scare '  and  in  1895  the  Venezuela 
message  did  the  same  thing.  These  troubles  are 


LOSSES  BY  PANIC  109 

due  not  only  to  the  bank  failures,  the  silver  ques- 
tion, and  the  Venezuela  message,  but  to  inherent 
defects  in  our  system.  Therefore  the  true  mode  of 
procedure  is  to  cure  the  system  so  that  it  can  in  the 
future  meet  similar  emergencies  and  not  be  over- 
whelmed by  them. 

With  only  25  per  cent,  it  is,  of  course,  impossible 
to  pay  100  per  cent.,  and  when  a  panic  occurs  a 
struggle  to  realize  on  investments  takes  place, 
prices  fall,  payment  of  debts  is  demanded,  failures 
are  precipitated,  and  liquidation,  which  is  commer- 
cial death  and  decomposition,  ends  all.  This  is  a 
panic,  and  every  such  occurrence  causes  distress  to 
families  and  sets  whole  communities  back  by  de- 
stroying productive  business  and  obliterating  accu- 
mulated capital.  The  loss  to  this  country  by  the 
panic  of  1837  was  then  estimated  at  six  thousand 
million  dollars.  This  was  the  greatest  monetary 
panic  which  the  world  has  ever  seen. 

Every  panic  brings  its  losses  and  restrictions  to 
business  by  the  disarrangement  it  causes. 

METHODS    OF    DEALING   WITH    PANICS. 

There  are  two  methods  of  dealing  with  panics, 
one  called  the  restrictive  and  the  other  the  ex- 
pansive. 

There  are  some  who  say  there  is  no  need  of  any 
regulation  of  this  subject.  They  say  that  the  debtor 
class  should  take  care  of  themselves  ;  that  the  gen- 
eral public  must  be  educated  to  recognize  that  the 
market  for  gold  or  other  forms  of  money  is  regu- 
lated by  the  same  laws  as  that  of  any  other  com- 


110     STATEMENT  BEFORE  SUB-COMMITTEE 

modity,  and  that  the  mysterious  "  money  question  " 
consists  of  nothing  but  the  simple  circumstance 
that  a  man  who  has  promised  to  deliver  a  certain 
amount  of  money  at  a  specific  date  is  bound  to  ful- 
fill his  contract  in  the  same  way  as  if  he  had  pro- 
mised to  deliver  wheat,  cotton,  or  iron. 

This  argument  would  be  correct  if  there  were  no 
credit  system  which  has  been  firmly  established  by 
two  hundred  years  of  business  and  incorporated 
into  the  laws  of  the  country.  If  commercial  trans- 
actions were  effected  by  barter,  the  above  view, 
which  is  from  Mr.  Sampson,  money  writer  of  the 
London  "  Times  "  in  1873,  would  be  correct.  But 
by  law  banks  are  conducted  on  the  credit  system, 
and  the  law  allows  them  to  contract  to  pay  money 
with  only  25  per  cent,  of  their  obligation  in  cash  on 
hand.  If  it  is  legal  for  banks  to  conduct  their 
affairs  on  the  credit  system,  and  if  failures  of  that 
system  happen  periodically,  then  the  law  should 
make  provision  to  meet  those  failures,  so  that  the 
credit  system  may  work  smoothly,  both  in  times  of 
peace  and  quiet,  and  in  times  of  disaster  and  com- 
motion. 

FOKCING   LIQUIDATIONS. 

The  restrictive  method  is  by  forcing  liquidations. 
An  enforced  liquidation  is  the  closing  of  a  financial 
transaction,  not  in  its  natural  order  (that  is,  when  a 
favorable  market  is  reached  and  all  parties  realize 
the  expected  profit),  but  by  an  arbitrary  demand  of 
a  creditor  who  is  not  interested  in  the  profit,  and 
who  merely  wants  his  money  to  provide  for  present 


THE   GENERAL  PUBLIC  SUFFERS       111 

and  anticipated  wants.  An  arbitrary  and  enforced 
liquidation  is  nearly  always  at  a  serious  loss.  The 
panic,  however,  is  stopped  because  enough  cash  is 
thereby  realized  to  supply  the  wants  of  creditors. 
So,  whenever  a  panic  occurs  liquidations  are  forced 
on  the  business  community,  and  the  results  are 
failures  and  their  attendant  calamities.  After  the 
panic  prices  recover,  and  the  only  difference  in  the 
situation  is  that  property  has  changed  hands,  many 
who  were  in  affluence  are  in  poverty,  and  some  in- 
vestors have  picked  up  bargains  from  which  they 
make  a  profit. 

The  chief  agents  in  enforcing  and  promoting 
liquidations  are  banks,  because  they  have  had  de- 
mands on  them  which  they  were  obliged  to  meet, 
and  their  only  resource  is  to  fill  up  their  diminished 
reserves  out  of  the  money  held  by  the  general  pub- 
lic. They  therefore  call  in  their  demand  loans  and 
refuse  to  renew  maturing  paper.  This  puts  the 
screws  on  the  money  market  and  the  life  blood  of 
commerce  flows  into  their  tills.  They  do  not  treat 
in  this  way  their  own  customers,  but  the  general 
public,  and  for  that  purpose  a  bank  is  careful  not 
to  invest  its  reserve  money  in  the  paper  or  loans  of 
its  customers,  but  of  those  known  to  them  only  by 
reputation.  There  is  no  intention  on  the  part  of 
banks  to  work  any  harm  to  any  one,  or  to  interfere 
with  general  business  in  thus  withdrawing  currency 
from  the  general  public.  The  general  public  is  the 
great  reservoir  of  currency,  and  the  law  provides, 
as  the  way  for  replenishing  reserves,  that  a  bank 
shall  not  discount  when  its  reserve  is  below  the 


112     STA  TEMENT  BEFORE  SUB-COMMITTEE 

legal  limit.  This  restrictive  method  of  restoring 
reserves  is,  therefore,  the  one  appointed  by  law. 
The  harm  and  damage  is  necessary  in  following  out 
the  provisions  of  the  law,  and  the  consciences  of 
bank  officers  are  relieved  of  all  responsibility,  even 
though  they  see  that  their  acts  must  cause  un- 
necessary failures. 

BANKS    DO   NOT    SUFFER   FROM   LIQUIDATION. 

On  the  other  hand,  banks  do  not  themselves 
suffer  from  the  operation  of  liquidations  to  any 
appreciable  extent.  They  hold  in  effect  mortgages 
on  the  estates  of  borrowers,  and  do  not  make  a  loss 
until  those  estates  are  exhausted.  Consequently 
the  restrictive  method,  which  is  death  to  business 
men,  seems  the  best  and  only  way  to  bank  officers. 
Their  loans  and  paper  are  paid,  their  dividends 
continue,  and  the  bankrupted  firms  and  the  injury 
to  business  are  forgotten.  The  loss  resulting  from 
every  money  panic  is  incalculable,  but  it  falls  on 
the  business  community  and  not  on  the  banks. 
Consequently,  when  bank  officers  are  asked  to  pre- 
pare a  banking  scheme  they  suggest  a  plan  like 
that  known  as  the  Baltimore  plan,  which  is  meant 
to  work  for  the  benefit  of  banks.  It  is  one  under 
which  panics  would  be  sure  to  happen.  But  what 
do  banks  care  for  panics  when  they  do  not  lose 
money  from  them  ?  Under  the  Baltimore  plan 
security  for  currency  was  proposed  to  be  aban- 
doned, the  banks  were  to  hold  the  security,  and  if 
a  panic  should  come  they  would  simply  apply  the 
screws,  and  soon  all  would  be  well  except  with  the 
unfortunate  business  community. 


RESTRICTION  AND  RUIN  113 

The  contingency  which  we  are  describing  is  one 
in  which  all  banks  have  simultaneously  a  heavy 
demand  made  upon  them.  Then  they  make  a  si- 
multaneous demand  upon  the  general  public,  and 
all  the  floating  supply  of  currency  disappears  in  a 
day.  This  must  be  the  result,  because  under  the 
credit  system  25  per  cent,  of  cash  is  calculated 
to  keep  in  solvent  condition  100  per  cent,  of  liabil- 
ities. By  the  system  of  reserve  cities,  the  25  per 
cent,  is  reduced  so  that  the  actual  cash  reserve  is 
only  about  10  per  cent.  In  this  condition  of  the 
credit  system,  as  noted  above,  a  demand  for  only 
a  few  per  cent,  of  banking  deposits  is  sufficient  to 
throw  the  finances  of  the  country  into  confusion. 
Such  a  demand  is  likely  to  occur  at  any  time,  and 
experience  shows  that  every  few  years  some  new 
and  unexpected  combination  of  events  takes  place 
which  produces  such  a  demand  with  its  attendant 
catastrophe. 

Excessive  restriction  of  credit,  says  MacLeod, 
causes  and  produces  a  run  for  gold,  and,  we  may 
add,  for  all  currency  on  a  par  with  gold.  Suspen- 
sion of  discounting  and  calling  of  loans  necessi- 
tates a  demand  for  currency  to  fill  the  place  of  the 
facilities  thus  withdrawn. 

EXPANSIVE   METHOD. 

The  restrictive  method  of  dealing  with  such 
events  produces  widespread  ruin,  and  we  turn 
therefore  to  the  expansive  method  to  see  if  better 
results  may  not  be  obtained  from  it.  MacLeod's 
correlative  statement  brings  us  to  the  consideration 


114     S TA  TEMENT  BEFORE  S  UB-COMMITTEE 

of  the  second  method.  He  says  :  "  In  the  modern 
system  of  dealing  with  panics,  called  the  expansive 
method  of  credit,  it  is  indispensably  necessary  that 
there  should  be  some  source  to  create  and  issue 
solid  credit  to  sustain  solvent  houses  in  a  mon- 
etary panic."  This  is  in  accordance  with  the  often- 
quoted  sentence  of  the  Bullion  Report  of  1810 
to  the  British  Parliament,  the  greatest  financial 

o 

document  which  was  ever  written.  "  An  enlarged 
accommodation  is  the  true  remedy  for  that  occa- 
sional failure  of  confidence  to  which  our  system  of 
paper  credit  is  unavoidably  exposed."  The  com- 
ment on  this  passage  made  by  Professor  Sumner  in 
his  "  History  of  American  Currency  "  is  :  "  The  rule 
of  the  bullion  committee  contemplated  the  loan  of 
notes  by  a  bank  whose  credit  cannot  fail  in  the 
wildest  panic." 

This  statement  of  the  expansive  theory  brings 
us  to  the  consideration  of  the  features  of  the  bill 
before  us,  H.  R.  3338. 

The  bill  is  intended  to  allay  or  prevent  panics 
and  to  equalize  interest  charges  by  providing  a 
means  whereby  banks  can  meet  the  demands  caused 
by  failures  of  confidence  in  the  credit  system  with- 
out putting  the  screws  on  the  business  community 
and  thereby  precipitating  a  panic  on  the  country. 

It  is  hardly  necessary  to  attempt  to  prove  that 
an  enlarged  accommodation  to  solvent  houses  will 
allay  a  panic.  A  panic  is  caused  by  the  fear  that 
the  reserves  will  be  exhausted  and  that  there  will 
not  be  enough  money  to  meet  all  demands.  If  a 
large  amount  of  fresh  money  can  be  had,  all  fears 


PROFESSOR   SUMNER'S   COMMENT      115 

will  be  removed.  If  that  amount  is  practically  in- 
exhaustible, then  the  panic  is  at  an  end. 

Professor  Simmer's  comment  is  correct,  that  such 
money  must  be  in  the  notes  of  a  bank  whose  credit 
cannot  fail  in  the  wildest  panic. 

Now  we  are  ready  to  test  the  bill  before  us  by 
these  most  stringent  requirements. 

OLD    UNITED    STATES    BANK. 

There  is  no  bank  in  the  United  States,  and  there 
never  again  can  be,  which  occupies  a  commanding 
position  like  the  old  United  States  Bank  or  the 
Bank  of  France,  to  which  other  banks  can  come 
and  secure  assistance  on  their  commercial  assets. 
A  large  governmental  bank  has  been  tried  and 
found  wanting  in  this  country. 

Few  contests  short  of  war  were  of  greater  viru- 
lence or  had  a  more  complete  influence  on  the  de- 
velopment of  republican  thought  than  that  which 
resulted  in  the  overthrow  of  the  United  States 
Bank.  General  Jackson  wrote  that  that  event  was 
necessary  "  to  preserve  the  morals  of  the  people,  the 
freedom  of  the  press,  and  the  purity  of  the  elective 
franchise."  Such  a  bank  is  monarchical  and  not 
republican.  The  only  resource  left  open  to  us  in 
this  country  is  to  combine  our  banks  into  groups, 
and  thus  secure  a  responsibility  equal  to  the  aggre- 
gate capital  of  all  the  associated  banks.  This  can 
be  done  by  incorporating  clearing  house  associ- 
ations in  the  manner  described  in  the  bill  under 
a  general  United  States  law,  which  shall  give  to 
clearing  houses  the  power  needed  to  issue  circulat- 


116     S  TA  TEMENT  BEFORE  S  UB-COMMITTEE 

ing  notes  on  commercial  assets.  By  this  means  the 
banks  will  be  provided  with  a  way  by  which  they 
may  secure  circulating  notes  of  a  credit  so  solid 
that  they  never  can  be  doubted  in  the  wildest  panic. 
The  pressure  would  then  be  taken  off  the  business 
community  and  placed  upon  the  banks  as  part  of 
their  legitimate  work. 

CLEARING   HOUSES    OF   ISSUE. 

The  incorporation  of  clearing  houses  creates  a 
grade  of  banks  with  limited  and  yet  higher  powers 
above  the  ordinary  commercial  banks  who  are  mem- 
bers of  the  clearing  houses.  Clearing  houses,  by 
this  bill,  are  intended  to  be  of  two  grades,  — -  first, 
ordinary  clearing  houses,  to  which  any  bank  through- 
out the  country  may  belong ;  and,  second,  clearing 
houses  of  issue,  of  which  there  shall  be  at  least  one 
in  each  State.  Any  clearing  house  whose  clear- 
ings are  over  $200,000,000  annually  may  also  be 
made  a  clearing  house  of  issue.  The  intention  of 
the  bill  is  only  to  allow  the  issue  of  clearing  house 
currency  to  be  made  in  the  largest  financial  centres 
of  the  country.  But  it  is  necessary  in  any  system 
for  a  local  issue  of  currency  that  the  boundaries  of 
States  shall  be  recognized.  These  are  not  merely 
geographical ;  they  are  political,  social,  and  legal. 
Business  men  become  accustomed  to  the  laws  and 
courts  of  their  States,  and  it  becomes  easier  and 
safer  for  them  to  do  business  within  those  limita- 
tions. Because  a  State  has  no  large  centre  of 
commerce,  it  should  not  be  deprived  of  the  benefits 
which  would  accrue  to  its  people  from  the  establish- 


ELEMENTS    OF   STRENGTH  111 

ment  of  a  clearing-  house  of  issue  within  its  bor- 
ders. The  regulation  of  the  internal  commerce  of 
States  is  to  a  large  extent  in  the  hands  of  the  sep- 
arate legislatures.  All  these  considerations  point 
in  the  direction  of  making  clearing  house  districts 
coterminous  with  state  boundaries.  Under  this 
bill  no  State  would  be  without  its  clearing  house  of 
issue,  and  in  the  larger  States  there  might  be  two. 
It  is  evident  that  the  combined  capital  of  banks  in 
the  separate  States  when  associated  in  clearing 
houses  would  give  a  basis  for  solid  credit  that 
would  be  recognized  from  one  end  of  the  land  to 
the  other.  Thus  one  element  to  meet  the  require- 
ment of  undoubted  credit  would  be  surely  present 
in  the  clearing  houses  of  issue  proposed  in  this 
bill. 

STRENGTH    OF   A    CLEARING    HOUSE    CURRENCY. 

Let  us  therefore  inquire  what  are  the  elements 
of  strength  in  a  currency  issued  in  this  manner. 

First.  The  commercial  assets  which  would  be 
pledged  are  chiefly  the  notes  of  customers  and  oth- 
ers, discounted  by  the  bank  after  careful  inspec- 
tion. These  notes  represent  the  entire  responsibil- 
ity of  the  makers,  and  are  a  lien  on  their  stock  in 
trade.  The  loans,  bonds,  and  notes,  held  by  banks, 
represent  the  business  and  property  of  the  borrow- 
ers of  the  country,  and  should  have  behind  them 
a  large  margin  of  property.  The  safety  of  these 
obligations  is  shown  by  the  good  dividends  declared 
by  the  banks  as  the  result  of  the  business  of  lend- 
ing and  discountrhg. 


118     STATEMENT  BEFORE  SUB-COMMITTEE 

Second.  The  second  element  of  strength  in  a 
currency  so  issued  is  that  the  notes  are  advanced 
only  for  75  per  cent,  of  the  value  of  the  assets 
pledged.  The  collateral  is  thus  strengthened  by 
the  equivalent  of  two  more  names,  the  bank  mak- 
ing the  pledge  and  the  margin  of  25  per  cent.  At 
this  stage  the  security  may  be  considered  equal  to 
four-name  paper,  —  the  specific  pledge,  the  respon- 
sibility of  the  maker,  the  margin,  and  the  respon- 
sibility of  the  bank. 

Third.  The  payment  of  the  notes  issued  is  guar- 
anteed to  the  holder  by  all  the  banks  in  the  clear- 
ing house  receiving  the  notes  by  vote  of  their 
boards.  The  addition  of  this  indorsement  gives  to 
the  clearing  house  currency  the  strength  of  the 
combined  capital  of  the  associated  banks,  and  adds 
to  the  collateral  a  fifth  name  which  is  stronger 

o 

than  all  the  other  four. 

Fourth.  By  the  extension  of  this  system  over 
the  whole  country,  the  banks  of  each  district  would 
first  guarantee  their  own  issues,  and  the  clearing 
houses  in  a  State  the  issues  in  that  State,  and  if 
that  guarantee  should  not  be  sufficient,  then  it  is 
assumed  by  all  the  clearing  houses  organized  un- 
der this  act  in  all  the  States  and  Territories.  This 
would  pledge  the  banking  capital  of  the  country 
for  the  redemption  of  the  currency  issued  by  the 
clearing  houses,  and  thus  place  the  responsibility 
therefor  where  it  belongs  —  that  is,  on  the  capital 
which  is  benefited  by  the  issue  and  on  the  banks 
whose  business  it  is  to  supervise  the  granting  of 
credits.  The  addition  of  these  last  guarantees 


NO  POSSIBILITY  OF  DOUBT  119 

adds  a  sixth,  seventh,  and  eighth  name  to  the  se- 
curity of  the  paper  currency  which  would  thus 
be  issued,  and  thus  raises  it  to  a  rank  of  credit 
which  cannot  be  reached  by  any  other  means  short 
of  a  government  guarantee. 

Fifth.  Notes  issued  by  one  clearing  house  are  to 
be  received  in  payment  of  debts  through  any  other, 
and  thus  the  notes  would  be  maintained  at  par 
over  the  whole  country. 

The  endeavor  is  to  produce  in  this  form  of  cur- 
rency as  strong  a  security  as  the  banks  of  the 
country  can  make.  There  should  be  no  possibility 
of  doubt  or  chance  of  difficulty  in  prompt  payment 
in  connection  with  it.  The  notes  are  intended  to 
be  such  as  Professor  Sumner  describes,  "  whose 
credit  cannot  fail  in  the  wildest  panic."  Only 
notes  of  that  description  will  be  sought  as  a  relief 
in  a  panic. 

The  example  of  clearing  houses  when  they  issue 
certificates  during  a  panic  should  be  taken  as  con- 
clusive in  this  matter.  The  kind  of  currency  they 
make  for  themselves  is  not  too  good  for  the  public. 

THE    BALTIMORE    PLAN. 

The  public  should  be  satisfied  with  nothing  less 
good  than  that  which  satisfies  the  banks.  Can 
banks  take  the  position  that  when  they  make  a 
currency  for  themselves  they  make  it  absolutely  as 
good  as  they  can  make  it,  but  when  they  make  a 
currency  for  the  public  it  need  not  be  so  good,  and 
occasional  losses  on  it  must  be  expected  ?  No  losses 
were  ever  made  on  clearing  house  certificates  be- 


120     STA  TEMENT  BEFORE  SUB-COMMITTEE 

cause  they  are  issued  on  the  principles  which  have 
been  incorporated  in  this  bill.  But  when  an  ex- 
pert appeared  before  the  House  Committee  on 
Banking  and  Currency  in  December,  1894,  to 
advocate  the  issue  of  notes  by  banks  under  the 
Baltimore  plan,  in  which  the  giving  of  security  is 
frankly  abandoned,  he  estimated  the  "  annual  crop 
of  insolvent  notes,"  to  use  his  own  words,  at  about 
12,160,000.  This  loss  under  the  Baltimore  plan 
is  to  be  carried  primarily  by  the  public,  and  ulti- 
mately paid  out  of  the  assets  of  the  failed  bank. 
He  acknowledges  that  these  notes  "  might  not  be 
redeemed  with  quite  the  same  promptness  as  they 
are  under  the  now  existing  arrangements,"  but  this 
he  considers  a  minor  difference.  But  is  it  so  ?  The 
title  "  sound  currency '  becomes  a  travesty  when 
applied  to  such  a  system. 

If  the  public  knows  that  there  is  to  be  expected 
under  any  system  an  annual  crop  of  over  two  mil- 
lions of  insolvent  and  defaulted  notes,  does  not 
that  vitiate  and  taint  the  whole  mass?  Does  it 
not  require  considerable  assurance  for  the  banks  to 
send  their  experts  here  to  advocate  a  system  of 
note  issues  on  which  the  profits  go  to  the  banks 
and  the  losses  to  the  public  ?  No,  gentlemen,  the 
country  looks  to  Congress  to  provide  a  note  circu- 
lation on  which  the  losses  shall  be  borne  by  those 
who  make  money  out  of  it,  and  which  shall  be  so 
good  that  the  banks  themselves  shall  maintain  it 
at  par  from  one  end  of  the  country  to  the  other. 
This  result  can  be  reached  by  incorporating  clear- 
ing houses  as  provided  in  this  bill.  A  loan  com- 


HOYT  SHERMAN'S   OPINION  121 

naittee  would  then  pass  upon  the  sufficiency  of  any 
collateral  offered  as  security  for  currency.  The 
loan  committee  would  be  interested  in  avoiding  a 
loss  which  if  made  would  fall  in  part  upon  their 
own  banks.  "  The  principle  of  fellowship  in  busi- 
ness underlying  the  state  bank  system,"  referred 
to  by  Hoyt  Sherman  in  his  address  before  the 
bankers  of  Iowa  in  1894,  which  worked  so  well  in 
that  system,  would  also  prevent  losses  from  con- 
tingent liability  under  a  clearing  house  system. 
No  bank  note  circulation  should  be  authorized  by 
Congress  which  is  not  good  enough  for  the  banks 
themselves.  If  the  banks  wish  the  privilege  of 
issuing  notes,  the  test  of  their  goodness  should  be, 
Will  they  agree  to  accept  the  currency  at  their 
own  counters  always  at  par  ?  If  the  answer  is  No, 
then  the  currency  is  not  good  enough  for  the  pub- 
lic. It  can,  of  course,  be  made  good  enough  by 
putting  enough  security  back  of  it.  Witness  the 
national  bank  currency  which  is  secured  by  govern- 
ment bonds. 

A    SECURED    CURRENCY. 

The  principle  of  a  secured  currency  is  the  second 
of  the  accepted  doctrines  of  the  financial  creed  of 
the  United  States.  It  is  a  principle  which  cannot 
be  abandoned  as  long  as  we  have  a  government  of 
the  people,  and  for  the  people,  and  by  the  people. 
It  has  grown  out  of  our  republican  institutions ;  it 
is  an  integral  and  necessary  part  of  banking  under 
general  laws ;  a  kind  of  banking  which  prevails 
nowhere  else  but  in  the  United  States.  It  was  a 


122      STA TEMENT  BEFORE  SUB-COMMITTEE 

new  principle  when  it  first  took  shape  in  the  New 
York  law  of  1838 ;  it  was  incorporated  in  the 
charter  of  the  Bank  of  England  in  1844,  and  has 
been  the  basis  of  the  national  currency  act  of  this 
country  since  1863.  It  is  futile  as  well  as  unsafe 
for  the  advocates  of  miscalled  "  sound  currency ' 
to  urge  the  frank  abandonment  of  that  principle, 
as  they  have  done  in  the  Baltimore  plan  and  in 
their  various  publications. 

A  secured  currency  merely  means  a  note  issue 
for  the  redemption  of  which  ample  collaterals  have 
been  deposited  in  the  hands  of  a  trustee.  It  might 
better  be  called  a  trustee  currency,  for  all  currency 
is  supposed  to  be  secured,  and  the  only  difference 
is  in  the  custodian  of  the  security.  Is  the  custo- 
dian the  bank  which  issues  the  notes,  or  is  it  an 
entirely  separate  and  distinct  party  acting  as  trus- 
tee for  the  note-holder  ? 

It  is  evident  that  the  note-holder  requires  the 
services  of  a  trustee.  An  issue  of  obligations 
which  is  to  be  divided  up  among  numerous  owners 
is  most  conveniently  made  under  some  form  of 
trust.  This  is  the  rule  with  railroad  mortgages. 
It  applies  with  still  greater  force  to  currency.  The 
proposition  that  the  currency  of  our  country  shall 
be  issued  by  numerous  banks,  and  the  goodness  of 
each  note  shall  depend  on  the  soundness  of  its 
issuer,  is  entirely  inadmissible.  As  the  business 
of  the  coimtrv  demands  numerous  banks,  the  sound- 

•> 

ness  of  the  currency  must  depend  on  collateral 
security  placed  in  the  hands  of  a  trustee.  If  the 
security  is  government  bonds  and  the  trustee  the 


A    TRUSTEE  IMPORTANT  123 

Treasurer  of  the  United  States,  confidence  in  cur- 
rency so  issued  is  immediately  established. 

GOVERNMENT  BONDS  AS  A  BASIS  FOR  CURRENCY. 

But  there  is  a  radical  difficulty  with  government 
bonds  as  the  basis  of  currency.  They  do  not  repre- 
sent the  business  transactions  of  the  country.  They 
do  not  represent  the  commodities  to  move  which 
currency  is  wanted,  and  are  therefore  inflexible  and 
inelastic.  An  elastic  currency  must  be  issued  for 
the  purposes  of  trade  and  commerce.  When  so 
issued  it  comes  into  existence  when  wanted,  and 
when  it  has  served  its  purpose  it  is  retired.  It  is 
capital  created  for  a  temporary  purpose.  Trade  and 
commerce  are  represented  by  the  obligations  of  mer- 
chants, therefore  the  commercial  assets  of  banks 
are  the  true  basis  for  the  issue  of  currency,  and 
when  so  issued  the  currency  is  necessarily  elastic. 

The  note-holder  cannot  inspect  the  condition  of 
the  bank  issuing  the  notes,  nor  the  character  of  the 
commercial  assets  on  which  the  notes  are  issued. 
He  must  take  both  on  faith  or  credit.  The  note- 
holder gives  his  confidence  completely,  and  he  with- 
draws it  in  the  same  way.  If  there  is  no  trustee 
to  act  for  him,  he  must  act  for  himself,  and  this  he 
does  in  short  order  by  presenting  the  notes  for 
redemption.  But  if  there  is  a  trustee  to  act  for 
him  and  the  trustee  holds  ample  security  to  pro- 
tect him,  and  if  any  possible  loss  is  protected  by 
adequate  guarantees,  then  his  mind  is  at  rest  and 
the  notes  pass  as  money  without  question  and  are 
received  freelv.  So  the  services  of  a  trustee  to 


1 24      S  TA  TEMENT  BEFORE  S  UB- C OMMITTEE 

watch  the  interests  of  the  public  is  an  absolutely 
essential  feature  in  any  system  which  is  to  give  a 
sound  currency  to  the  people. 

The  trustee  named  in  this  bill  who  shall  hold  the 
collateral  security  to  the  notes  to  be  issued  is  the 
clearing  house  of  issue.  Of  this  grade  there  is 
provided  one  for  each  State,  and  any  clearing  house 
effecting  almual  clearings  of  1200,000,000  may 
become  such.  The  confidence  of  the  people  of  a 
State  would  naturally  be  given  to  the  clearing  house 
of  issue  of  their  own  State.  State  pride  would  be 
invoked  to  keep  its  management  and  credit  good. 
Each  State  would  thus  have  the  naming  of  the 
trustee  who  should  hold  the  securities  collateral  to 
the  notes  issued  in  their  own  borders.  No  one 
could  call  in  question  the  faithfulness  of  such  a 
trustee.  The  provision  contained  in  the  tenth  sec- 
tion, that  the  clearing  houses  of  a  State  are  prima- 
rily responsible  for  any  loss  from  the  insufficiency 
of  the  collateral  pledged,  would  produce  such  scru- 
tiny and  care  that  it  is  improbable  that  there  would 
be  any  annual  crop  of  insolvent  notes,  and  if  any, 
the  amount  would  be  small.  The  prospect  of  a 
contingent  liability  to  loss  would  be  sure  to  produce 
caution  and  conservative  action,  as  was  the  case 
with  the  old  state  bank  system. 

CURRENCY  TO  BE  EVERYWHERE  AT  PAR. 

A  currency  to  be  acceptable  to  the  people  must 
be  at  par  in  all  parts  of  the  country. 

This  is  the  third  and  last  article  of  the  short 
financial  creed  of  the  United  States.  The  people 


A    UNIVERSAL   CURRENCY  125 

demand  that  the  government  shall  require  that  all 
money  which  it  authorizes  to  be  issued  shall  be 
maintained  at  a  parity  ;  to  the  end  that  each  dollar, 
whatever  may  be  its  composition,  shall  have  equal 
purchasing  and  debt-paying  power  with  every  other 
dollar,  and  that  no  currency  shall  be  issued  which 
is  not  convertible  into  coin.  In  section  12  it  is 
provided  that  the  circulating  notes  issued  in  ac- 
cordance with  the  provisions  of  this  bill  shall  be 
received  at  par  at  all  the  clearing  houses  organized 
under  this  act.  Other  acts  and  bills  provide  that 
notes  shall  be  good  at  the  counter  of  the  bank 
issuing  them,  and  that  if  not  paid  on  demand  the 
bank's  assets  shall  be  liquidated  and  the  notes  paid 
out  of  the  proceeds.  This  would  seem  to  proceed 
on  the  assumption  that  the  bank  confers  a  favor  on 
the  community  by  issuing  its  notes,  whereas  the 
fact  is  that  the  people  confer  the  favor  on  the 
bank  by  allowing  it  to  issue  and  circulate  its  notes 
as  money.  If  the  people  give  to  the  banks  this 
opportunity  to  engage  in  a  productive  business,  the 
bank  should  not  only  guarantee  the  public  against 
ultimate  loss,  but  against  any  delay. 

INSOLVENT    NOTES. 

Time  is  money.  If  a  man's  solvency  depends  on 
the  payment  of  a  note  and  he  has  the  bank  bills  in 
hand  for  that  purpose,  it  is  no  consolation  to  be  told 
that  the  bills  are  not  good  now,  but  are  sure  to  be 
paid  in  a  year  or  two  by  means  of  a  sinking  fund 
or  a  liquidation.  It  is  a  contradiction  of  terms  to 
speak  of  a  currency  that  is  not  good  at  all  times 


126      STATEMENT  BEFORE  SUB-COMMITTEE 

and  in  all  places.  The  banks  should  pay  the  cur- 
rency of  defaulted  banks  and  relieve  the  public  of 
the  annual  crop  of  insolvent  notes,  and  repay  them- 
selves from  the  proceeds  of  the  liquidation.  If 
there  were  any  insolvent  notes,  they  would  be  the 
result  of  errors  of  judgment  on  the  part  of  the 
banks.  The  banks  are  in  a  position  to  carry  such 
notes  with  ease,  whereas  they  are  a  grievous  bur- 
den to  the  community.  The  features  of  a  clearing 
house  currency  then  are  :  - 

First.     Selected  commercial  assets  as  collateral. 

Second.  The  issue  of  circulating  notes  to  be  at 
75  per  cent,  of  estimated  value. 

Third.     A  pledge  with  a  trustee. 

Fourth.  Convertibility  on  demand  through  all 
clearing  houses  in  the  United  States. 

If  it  is  said  that  these  provisions  are  too  oner- 
ous, the  reply  is  that  nothing  less  secure  should  be 
authorized  by  Congress.  A  single  panic  is  more 
onerous  than  any  measure  of  relief  which  will  ward 
it  off.  If  "  an  enlarged  accommodation  is  the  true 
remedy  for  that  occasional  failure  of  confidence  to 
which  our  system  of  paper  credit  is  unavoidably 
exposed,"  that  accommodation  must  be  in  the 
"  notes  of  a  bank  of  issue  whose  credit  cannot  fail 
in  the  wildest  panic." 

Various  objections  to  this  method  of  issuing  cur- 
rency have  been  presented  and  answered,  and  now 
let  us  consider  the  advantages  which  the  operation 
of  the  bill  gives  both  to  banks  and  the  community. 


THE   POINT  OF  EXHAUSTION          127 
IMMUNITY   FROM   PANICS. 

The  chief  benefit  to  both  banks  and  the  people 
is  in  the  immunity  from  monetary  panics  which  it 
would  secure.  A  monetary  panic  is  not  always  a 
failure  of  confidence  in  banks  or  in  the  government 
or  in  the  goodness  of  the  currency.  It  is  often 
simply  an  awakening  to  the  fact  that  depositors 
have  withdrawn  currency,  and  banks  generally  are 
too  near  the  point  of  exhaustion,  and  that  no  relief 
is  in  sight.  A  general  withdrawal  of  10  per  cent, 
would  produce  this.  The  incorporation  of  clearing 
houses  under  United  States  laws,  with  power  to 
issue  a  solid  currency,  would  relieve  this  apprehen- 
sion. The  railway  or  manufacturing  corporation 
with  weekly  and  monthly  pay  rolls  to  meet,  and 
the  merchant  with  his  bills  and  notes  to  pay, 
would  not  have  to  go  into  the  market  and  buy  cur- 
rency for  their  wants  or  pay  extravagant  rates  for 
money.  All  necessity  for  hoarding  currency  would 
be  removed,  for  who  would  hoard  that  of  which 
there  would  always  be  a  plentiful  supply  on  good 
collaterals  ?  The  way  our  banking  system  is  run- 
ning now  may  be  compared  to  an  engine  without 
a  safety  valve.  If  the  engineer  will  only  watch 
closely  enough,  and  if  the  steam  never  rises  above 
the  danger  point,  there  is  no  fear  of  an  explosion. 
It  is  against  common  sense  to  run  an  engine  with- 
out a  safety  valve,  and  so  the  law  should  provide 
a  safety  valve  attachment  to  be  put  upon  banking 
and  commerce,  in  order  that  explosions  in  the  form 
of  panics  might  not  be  constantly  following  every 


128     STATEMENT  BEFORE  SUB-COMMITTEE 

increased  pressure  on  the  money  market.  Nor 
could  a  farmer  successfully  cultivate  his  fields  if  he 
were  exposed  to  frequent  earthquakes  and  erup- 
tions. Stability  of  the  earth's  surface  is  not  more 
essential  to  farming  than  freedom  from  the  up- 
heavals of  financial  panics  is  to  trade. 

It  might  be  asked  why  a  new  method  of  issuing 
clearing  house  currency  should  be  adopted,  when 
banks  of  the  large  money  centres  now  may  and  do 
issue  their  clearing  house  certificates  when  occa- 
sion demands  ?  The  answer  is  that  the  issuing  of 
clearing  house  certificates  means  the  paying  out  of 
currency  to  an  equal  extent ;  and  this  is  a  most 
dangerous  course  for  interior  banks.  The  currency 
goes  out  but  never  comes  back,  and  serious  trouble 
would  thereby  be  occasioned.  But  power  to  issue 
clearing  house  currency  has  the  opposite  effect. 
The  gold  and  legal-tender  reserve  is  retained,  and 
the  clearing  house  currency  has  a  local  circulation. 
If  used  in  the  purchase  of  produce,  the  notes  would 
not  perform  their  circuit  before  the  proceeds  of  the 
produce  could  be  in  bank  to  meet  them. 

PROFIT   ON    CIRCULATION. 

In  section  9,  lines  33  and  34,  it  is  provided  that 
the  charges  for  issues  of  circulating  notes  shall  be 
regulated  by  each  clearing  house  of  issue.  This 
places  the  whole  matter  of  profit  on  circulation 
under  the  control  of  clearing  houses.  The  profit 
might  be  divided  between  the  bank  receiving  the 
notes  and  the  clearing  house  of  issue,  but  it  is  evi- 
dent that  there  would  be  both  accommodation  and 
profit  from  the  issues. 


UNITED  ACTION  129 

A  community  of  interest  among  banks  such  as 
was  successfully  in  operation  under  the  state  bank 
system  of  Indiana,  Ohio,  Iowa,  and  other  States, 
and  is  provided  in  our  bill,  involves  a  closer  rela- 
tionship than  at  present  exists  among  banks.  If 
banks  receive  at  par  the  clearing  house  currency 
issued  in  other  parts  of  the  country  from  their 
own,  it  becomes  immediately  a  practical  necessity 
that  representatives  of  distant  banks  should  meet 
each  other,  exchange  views,  and  adopt  regulations 
to  govern  banking  transactions.  Also  that  repre- 
sentatives of  banks  within  clearing  house  districts 
should  meet  at  stated  times  for  the  same  purpose. 
There  would  be  a  practical  object  in  these  meet- 
ings. Experience  would  be  exchanged,  and  a  mass 
of  information  gathered  which  would  promote  con- 
servative management. 

STATE   AND   NATIONAL    ASSOCIATIONS. 

Provision  is  therefore  made  in  sections  23  and 
24  of  this  bill  for  the  formation  of  state  and 
national  banking  associations.  The  meetings  of 
state  associations  and  the  national  convention 
would  give  opportunities  for  accustoming  our  banks 
to  united  action.  These  unions  would  strengthen 
our  national  life,  and  in  any  occasion  of  great 
emergency  our  banks  would  be  trained  to  use  and 
exercise  their  power  for  the  public  benefit.  If  the 
financial  sceptre  is  ever  to  pass  across  the  Atlantic, 
our  hands  must  be  made  ready  to  hold  it. 


130  BILL    TO  PROTECT  CREDIT 


54-TH  CONGRESS,  IST  SESSION,  H.  R.  3338. 

In  the  House  of  Representatives,  January  7,  1896.  Read 
twice,  referred  to  the  Committee  on  Banking  and  Cur- 
rency, and  ordered  to  be  printed. 

Mr.  Fairchild  (by  request)  introduced  the  fol- 
lowing bill :  — 

A  bill l  to  protect  and  support  commercial  credit, 
to  equalize  rates  of  interest,  to  provide  for  the  in- 
corporation of  clearing  houses,  to  regulate  and 
define  their  operations,  to  provide  a  clearing  house 
currency  secured  by  pledge  of  commercial  assets 
and  the  responsibility  of  the  associated  banks,  and 
to  provide  for  the  circulation  and  redemption 
thereof. 

Be  it  enacted  by  the  Senate  and  House,  of  Re- 
presentatives of  the  United  States  of  America  in 
Congress  assembled,  That  associations,  to  be  known 
Articles  of  as  clearing  houses,  for  the  settlement  of 
association.  money  transactions  by  effecting  clear- 
ances between  banks,  and  for  doing  other  business 
for  and  between  banks,  not  inconsistent  with  the 
provisions  of  this  Act,  may  be  formed  by  any  num- 

1  This  bill  follows  in  its  form  and  a  large  part  of  its  phrase- 
ology the  National  Currency  Act  of  186o,  which  is  based  on  the 
banking  laws  of  the  various  States,  and  thus  constitutes  the  best 
model  for  a  general  banking  law.  Some  of  the  sections  follow 
the  laws  of  New  York  and  Iowa.  The  methods  of  the  New  York 
Clearing  House  in  the  issue  of  clearing  house  certificates  are 
adapted  to  the  issue  of  a  currency.  Slight  changes  have  been 
made  in  the  original  text  of  the  bill  to  simplify  it,  and  section  11 
has  been  added  to  endeavor  to  secure  a  large  mass  of  gold  at  no 
expense  to  the  banks,  after  the  manner  of  the  Bank  of  France. 


THE  PROPOSED  BILL  131 

ber  of  banks,  not  less  than  five,  duly  incorporated, 
either  under  the  national  currency  Act  or  under 
the  laws  of  any  State  or  Territory  of  which  a  ma- 
jority shall  be  organized  under  the  national  cur- 
rency Act,  in  any  city  of  not  less  than  six  thousand 
inhabitants,  who  shall  enter  into  articles  of  associa- 
tion for  the  regulation  of  the  business  of  the  asso- 
ciation and  the  conduct  of  its  affairs,  which  said 
articles  shall  be  approved  by  the  stockholders  of 
each  bank  uniting  to  form  the  association  at  a 
meeting  called  for  the  purpose  and  shall  be  signed 
by  the  officers  of  each  bank  by  authority  conferred 
upon  them  to  do  so  by  vote  of  the  stockholders, 
and  a  copy  of  them  forwarded  to  the  Comptroller 
of  the  Currency,  to  be  filed  and  preserved  in  his 
office. 

SEC.  2.    That  the  banks  uniting  to  form  such  an 
association  shall,  by  their  proper  officers,   organization 
make  an  organization   certificate,  which  certl 
shall  specify  — 

First.  The  name  assumed  by  such  association, 
which  name  shall  be  "  The  Clearing  House  of 
(giving  the  name  of  the  city  where  located  and 
where  its  business  of  effecting  clearances  shall  be 
carried  on)."  v 

Second.  The  names,  the  amounts  of  the  'capital 
stock,  and  the  number  of  shares  into  which  it  is 
divided,  of  the  banks  composing  the  association. 

Third.  A  declaration  that  said  certificate  is  made 
to  enable  such  banks  to  avail  themselves  of  the 
advantages  of  this  Act. 

The  said  certificate  shall  be  acknowledged  before 


132  BILL    TO  PROTECT  CREDIT. 

a  judge  of  some  court  of  record  or  a  notary  public, 
and  such  certificate,  with  the  acknowledgment 
thereof  authenticated  by  the  seal  of  such  court, 
shall  be  transmitted  to  the  Comptroller  of  the  Cur- 
rency, who  shall  record  and  carefully  preserve  the 
same  in  his  office.  Copies  of  such  certificate,  duly 
certified  by  the  Comptroller  and  authenticated  by 
his  seal  of  office,  shall  be  legal  and  sufficient  evi- 
dence in  all  courts  and  places  within  the  United 
States,  or  the  jurisdiction  of  the  government 
thereof,  of  the  existence  of  such  association  and 
of  every  other  matter  or  thing  which  could  be 
proved  by  the  production  of  the  original  certificate. 
SEC.  3.  That  every  association  formed  pursuant 

Corporate  *°  *ne  provisions  of  this  Act  shall,  from 
powers.  .Qie  fafe  Q£  j.jie  executioii  of  its  organi- 
zation certificate,  be  a  body  corporate,  but  shall 
transact  no  business  except  such  as  may  be  inci- 
dental to  its  organization,  and  necessarily  prelim- 
inary, until  authorized  by  the  Comptroller  of  the 
Currency  to  commence  the  business  of  effecting 
clearances.  Such  associations  shall  have  power  to 
adopt  a  corporate  seal  and  shall  have 
succession  by  the  name  designated  in  its 
organization  certificate  for  the  period  of  twenty 
Term  of  years  from  its  organization,  unless  sooner 
dissolved  according  to  the  provisions  of 
its  articles  of  association,  or  by  act  of  the  banks 
owning  two  thirds  of  the  capital  stock  represented 
in  the  association,  or  unless  the  franchise  shall  be 
forfeited  by  a  violation  of  this  Act ;  by  such  name 
it  may  make  contracts,  sue  and  be  sued,  complain 


THE  PROPOSED  BILL  133 

and  defend  in  any  court  of  law  or  equity,  as  fully 
as  natural  persons  ;  it  may  elect  or  appoint 
directors,  and  by  its  board  of  directors  suits,  om-' 
appoint  a  president,  vice-president,  trea- 
surer, and  other  officers,  define  their  duties,  require 
bonds  of  them,  and  fix  the  penalty  thereof,  dismiss 
said  officers,  or  any  of  them,  at  pleasure,  appoint 
others  to  fill  their  places,  and  exercise  under  this 
Act  all  such  incidental  powers  as  shall  be  Incidentai 
necessary  to  carry  on  the  business  of  a  po 
clearing  house  for  the  settlement  of  money  trans- 
actions by  the  mutual  set-off  of  debits  and  credits, 
commonly  called  making  clearances  for  banks,  and 
by  obtaining  and  issuing  to  the  banks  composing 
the  association  notes  according  to  the  provisions  of 
this  Act,  and  by  acting  as  trustee  for  the   Act 
note-holders  in  accordance  with  the  pro- 
visions  of  this  Act,  by  receiving  and  hold- 
ing in  trust  securities  pledged  by  the  members  of 
the  association  as  collateral  to  the  notes  issued  to 
them,  to  be  called  "  clearing  house  currency,"  and 
by  acting  for  the  members  of  the  associa- 
tion in  their  united  capacity  when  author-  members  of 

.        -i  T  -,  .  ,,  association. 

ized  to  do  so  by  a  majority  vote  ot  said 
members  ;  and  its  board  of  directors  shall  also  have 
power  to  define  and  regulate  by  by-laws 
not    inconsistent   with   the   provisions  of 
this  Act  the  manner  in  which  its  directors  shall  be 
elected    or   appointed,    its   officers    appointed,    its 
property   transferred,    its    general    business    con- 
ducted, and  all  the  privileges  granted  by  this  Act 
to  associations  organized  under  it  shall  be  exer- 


as 


134  BILL    TO  PROTECT  CREDIT 

cised  and  enjoyed  ;  and  its  usual  business  shall  be 

transacted  at  an  office  or  banking  house  located  in 

the  place  specified  in  its  organization  certificate. 

SEC.  4.    That  the   affairs    of   every  association 

shall  be  managed  by  not  less  than  nine 

Directors.  .  . 

directors,  one  of  whom  shall  be  the  pre- 
sident, a  majority  of  whom  shall  be  directors  in 
banks,  members  of  the  association  which  are  organ- 
ized under  the  national  currency  Act.  Every  direc- 
Quaiifica-  *or  shall,  during  his  whole  term  of  service, 

be  a  citizen  of  the  United  States,  and  at 
least  two  thirds  of  the  directors  shall  have  resided 
in  the  State,  Territory,  or  district  in  which  such 
association  is  located  one  year  next  preceding  their 
election  as  directors,  and  be  residents  of  same 
during  their  continuance  in  office.  Each  director 
oaths  of  when  appointed  or  elected  shall  take  an 

directors.          Qath    ^    he  ^  g()   far  ^    ^    ^^    ^_ 

volves  on  him,  diligently  and  honestly  administer 
the  affairs  of  such  association  and  not  knowingly 
violate,  or  willingly  permit  to  be  violated,  any 
of  the  provisions  of  this  Act,  which  oath,  sub- 
scribed by  himself  and  certified  by  the  officer  be- 
fore whom  it  is  taken,  shall  be  immediately  trans- 
ferred to  the  Comptroller  of  the  Currency,  and  by 
him  filed  and  preserved  in  his  office.  At  the  an- 
nual meetings  there  shall  be  appointed  or  elected  a 
Loan  loan  committee,  whose  duties  shall  be  as 

3e'     described  in  sections  nine  and  ten  of  this 
Act.      Members  of    this    committee   shall   not   be 
eligible  for  reelection  or  reappointment 


election.        until  one  year  after  their  terms  of  office 


THE  PROPOSED  BILL  135 

shall    have    expired.     They  shall  be  divided   into 
three  classes  at  their  first  election  or  ap- 

Classes  of. 

pointment,  one  third  shall  serve  one  year, 

one  third  two  years,  and  one  third  three  years,  and 

at  every  election  or  appointment  thereafter  they 

shall  be  elected  or  appointed  for  a  term  of  three 

years. 

SEC.  5.    That  the  directors  of   any  association 
first  elected  or  appointed  shall  hold  their 

i  -i         i      •  i      n       i         Tenure  of 

places    until    their   successors    shall    be  office  of 

directors. 

elected   and   qualified.      All    subsequent 
elections  shall  be  held  annually  on  such  day  in  the 
month  of  January  as  may  be  specified  in  Elections 
the  articles  of  association,  and  directors 
so  elected  shall  hold  their  places  for  one  year  and 
until   their  successors  are   elected   and   qualified. 
But  any  director  having  in   any  manner  become 
disqualified  shall  thereby  vacate  his  place.     Any 
vacancy  in  the  board  shall  be  filled  by  appointment 
by  the  remaining  directors,    and  any  director  so 
appointed  shall  hold  his  place  until  the  next  elec- 
tion.   If  from  any  cause   an  election  of 

Failure  to 

directors  shall  not   be  made   at  the  time  hold  annual 

election. 

appointed,  the  association  shall  not  for 
that  cause  be  dissolved,  but  an  election  may  be 
held  on  any  subsequent  day,  thirty  days'  notice 
thereof  in  all  cases  having  been  given  in  a  newspa- 
per published  in  the  city,  town,  or  county  in  which 
the  association  is  located.  If  the  articles  of  asso- 
ciation do  not  fix  the  day  on  which  the  election 
shall  be  held,  or  if  the  election  should  not  be  held 
on  the  day  fixed,  the  day  for  the  election  shall  be 


136  BILL    TO  PROTECT  CREDIT 

designated  by  the  board  of  directors  in  their  by- 
laws or  otherwise  :  Provided,  That  if  the  directors 
fail  to  fix  the  day,  as  aforesaid,  banks  representing 
two  thirds  of  the  capital  stock  represented  in  the 
association  may. 

SEC.  6.    That  in  all  elections  of  directors,  and 
^n  deciding  all  questions  at  meetings  of 
members  of  the    association,   each    bank 
member  shall  be  entitled  to  a  represen- 
tation equal  to  the  minimum  number  of  directors 
allowed  by  law  to  said  bank,  but  no  bank  organized 
under  a  state  or  territorial  law  shall  be  entitled  to 
a  greater  representation  at  such  meetings  than  that 
of  a  national  bank.     Directors  of  a  bank  who  shall 
be  appointed  to  represent  said  bank  at  meetings  of 
the   association  may  vote  by  proxy  duly 
authorized  in  writing,  but  no  officer,  clerk, 
teller,  or  bookkeeper  of  such  association  shall  act 
as  proxy,  and  no  bank  any  of  whose  liabilities  are 
past  due  and  unpaid  shall  be  allowed  representa- 
tion in  the  board  of  directors  or  at  the  meetings  of 

o 

the  association. 

SEC.  7.  That  if,  upon  a  careful  examination  of  the 
comptroi-  facts  so  reported,  and  of  any  other  facts 
cateoT*  which  may  come  to  the  knowledge  of  the 
Comptroller,  whether  by  means  of  a  spe- 
cial commission  appointed  by  him  for  the  purpose 
of  inquiring  into  the  condition  of  such  association 
or  otherwise,  it  shall  appear  that  such  association 
is  lawfully  entitled  to  commence  the  business  of  a 
clearing  house  as  described  in  this  Act,  the  Comp- 
troller shall  give  to  such  association  a  certificate, 


THE  PROPOSED  BILL  137 

under  his  hand  and  official  seal,  that  such  associa- 
tion has  complied  with  all  the  provisions  of  this 
Act  required  to  be  complied  with  before  being  en- 
titled to  commence  the  business  of  a  clearing  house 
under  it,  and  that  such  association  is  authorized  to 
commence  said  business  accordingly  ;  and 

P     .  Publication 

it  shall  be  the  duty  of  the  association  to  of  certifi- 

cate. 

cause  said  certificate  to  be  published  in 
the  city  or  county  where  the  association  is  located 
for  at  least  sixty  days  after  the  issuing  thereof. 
SEC.  8.    That  the  clearing  house  association  or- 

O 

ganized  under  this  Act,  in  the  chief  com-  Clearin 
mercial  city  in  each  State,  or  in  the  city  |^es  of 
most  central  and  convenient  for  business   one  in  each 

State. 

in  each  State,  or  any  clearing  house  so   Any  with 

••        i      tv      i  •          i         11          •  f  clearings  of 

organized  etiectmg  bank  clearings  ot  over   over  $-200,- 
two  hundred  million  dollars  annually,  to  nuaiiytobe 
be  designated  and  approved  by  the  Comp-  houses  of 
troller  of  the   Currency,  shall  be  made  a 
clearing   house   of  issue.     And   if   there  shall  be 
more  than  one  clearing  house  of  issue  in  comptroller 
a  State,  then  the  Comptroller  of  the  Cur- 
rency  shall  divide  the  State  into  clearing 
house  districts,  and  banks  in  each  State 
or  district  shall  do  business  only  with  the  clearing 
house  of  issue  in  their  State  or  district. 

SEC.   9.    That    a   clearing  house  of  issue  shall 
be  authorized  and  empowered  to  receive  from  its 
bank  members,  or  from  any  bank  mem-  Powersof 
ber  of  a  clearing  house  within  its  State 
or  district,  with  the  approval  of  the  di- 
rectors of  said  clearing  house,  commercial  assets, 


138  BILL    TO  PROTECT  CREDIT 

promissory  notes,  bills  of  exchange,  convertible 
Ma  receive  bonds  and  stocks,  and  other  securities  and 
M  collateral  evidences  of  debt  as  collateral  security  for 
to  currency.  ^ie  cjrcu}ating  notes  of  the  said  associa- 

tion to  be  issued,  as  provided  in  this  Act,  and  on 
the  approval  of  the  value  of  said  commercial  assets 

bv  its  loan  committee,  the  said  clearing- 
May  advance      *  „   .  ,  ,.  •  i  i 

75  per  cent,    house  ot  issue  may  deliver  to  said  bank 

thereon  in  /,          .  , 

circulating  member  seventy-nve  per  centum  or  said 
value  in  its  said  circulating  notes  as  an 
advance  upon  said  pledged  property,  and  shall  re- 
quire from  said  bank  member  its  promissory  note 
of  equal  amount,  which  note  shall  be  in  form  as 
approved  by  said  clearing  house  of  issue.  The 
Bank  mem-  bank  member  taking  said  circulating  notes 
e-  shall  engage  to  redeem  them  at  all  times 


to  re 


Ses,aandU  when  called  upon  to  do  so  by  the  clearing 
ttoVnaid<  house  issuing  the  notes  and  to  give  any 

additional  collateral  needed  to  restore  any 
depreciation  in  the  value  of  the  assets  pledged,  on 
demand  ;  and  on  failure  to  comply  with  such  de- 
mands before  the  close  of  business  hours  of  the 
day  when  made,  said  bank  member  shall  be  ad- 

judged in  default,  and  shall  be  thereupon 

Default.  ,  ,  ,  .  ...-, 

closed  pending  an  examination  by  a  com- 
mittee from  the  association  which  issued  the  notes. 
Provisions  On  recommendation  by  the  examining 
£gorqi!lying  committee,  the  loan  committee  shall  pro- 
advances.  ceed  to  liquicjate  rtie  ioan  by  turning  the 

securities  into  cash,  in  accordance  with  the  method 
provided  in  section  ten.  The  bank  member  taking 
said  notes  may  release  its  securities  from  pledge 


THE  PROPOSED  BILL  139 

by  depositing  with  the  said  clearing  house  of  issue 
clearing  house  currency,  United  States  legal-tender 
notes,  or  coin  certificates,  with  any  charges  made 
by  said  clearing  house  of  issue,  whereupon  it  shall 
be  entitled  to  and  shall  receive  all  its  securities  so 
pledged.  The  charges  shall  be  regulated 

i        i          •  l  -    .  TT  Charges  reg- 

bv  each  clearing  house  ot  issue.      Upon  uiateJby 

.  .  each  clear- 

the  receipt  ot   such  deposit  the  clearing  ing  house  of 

issue. 

house  of  issue  shall  immediately  give  no- 
tice in  a  newspaper  published  in  the  city,  town,  or 
county  in  which  the  association  is  located, 

,.,  .  in!  i  i  •   i       i  i  Advertise- 

which  notice  shall  be  published  at  least  ment  of  re- 

.  .  demption  of 

once  a  week  tor  six  months  successively,   circulating 

.        notes. 

that  the  notes  of  such  bank  member  will 
be  redeemed  at  par ;  and  that  all  the  outstanding 
circulating  notes  of  such  bank  member  must  be  so 
presented  for  redemption  within  six  years 

„  .  -in^  Must  be  pre- 

trom  the  date  ot  such  notice,  and  all  notes  sented  in  six 
which  shall  not  be  thus  presented  for  re- 
demption and  payment  within  the  time  specified  in 
such  notice  shall  cease  to  be  a  charge  upon  the 
funds  in  the  hands  of  the  clearing  house  for  that 
purpose.  At  the  expiration  of  such  notice,  it  shall 
be  lawful  for  the  clearing  house  of  issue 

Bank  mem- 

to    surrender,    and    such  bank    member,   ber  entitled 

.  .  to  receive 

or  their    legal    representatives,  shall    be  money  re- 

•  •  •          maining 

entitled  to  receive  all  the  money  remain-   after 

redemption. 

ing  after  such  redemption,  except  so  much 
thereof  as  may  be  necessary  to  pay  the  reasonable 
expenses  chargeable  against  the  said  accounts,  in- 
cluding the  payment    for  the  publication  of    the 
above-mentioned  notices. 


140  BILL    TO  PROTECT  CREDIT 

SEC.  10.  That  each  bank  member  taking  such 

o 

Guarantee      circulating    notes     shall    guarantee    the 


clearing  house  of  issue  from  loss  resulting 
from  such  issue  to  them,  and  in  case  of  a 
default  in  the  payment  of  a  loan  when  demanded 
by  the  clearing  house  of  issue  or  of  default  arising 
in  any  other  manner,  then  it  shall  be  the  duty  of 
said  clearing  house  of  issue  to  levy  upon  all  the 
Guarantee  clearing  houses  in  said  State  or  district, 
hfsatateaorks  in  proportion  to  the  capital  of  their 
bank  members,  a  sufficient  sum  to  pro- 
vide for  the  payment  of  said  loan,  which  sum  shall 
be  held  for  the  payment  and  redemption  of  the 
circulating  notes  so  issued.  And  if  enough  money 
cannot  be  obtained  by  such  assessments,  then  it 
shall  be  the  duty  of  said  clearing  house  of  issue  to 
report  to  the  Comptroller  of  the  Currency  the  fact 
Guarantee  °^  sa^  default,  and  it  shall  be  his  duty 
to  levy  a  further  assessment  upon  all  the 
clearing  houses  organized  under  this  Act 
in  all  the  States  and  Territories  until 
such  sum  is  secured,  in  which  case  the  funds  so 
raised  by  the  Comptroller  shall  be  paid  by  him  to 
the  Treasurer  of  the  United  States  as  a  special 
fund  to  pay  the  circulating  notes  of  the  defaulting 
bank  member,  and  he  shall  appoint  a  receiver  for 
the  collateral  securities  to  the  loan  or 

Liquidation  . 

of  loans  by     loans  in  default,  who  shall  take  possession 

Comptroller. 

thereof  and  turn  them  into  cash  and  dis- 
tribute the  proceeds  to  the  banks  which  have  con- 
tributed to  the  assessment,  and  any  surplus  after 
reimbursing  them  their  advances  shall  be  handed 


THE  PROPOSED  BILL  141 

over  to  the  bank  member  in  default  or  its  legal 
representative.     But  if  the  assessment  by 

Liquidation 

the  clearing  house  01  issue  011  the  banks  of  loans  by 

clearing 

of  its  State  or  district  is  sufficient  to  pro-  house  of 

issue. 

vide  the  needed  funds,  then  the  collater- 
als shall  be  administered  upon  and  turned  into  cash 
by  the  loan  committee  or  by  a  liquidating  com- 
mittee of  said  clearing  house  of  issue  and  the  cash 
proceeds  shall  be  appropriated  as  above  provided. 
At  no  time  shall  the  total  amount  of  such 

Amount  of 

notes  issued  to  any  bank  member  exceed  circulation 

.        obtainable. 

the  amount  at  such  time  actually  paid  in 
of  the  capital  stock  of  the  bank  member  so  apply- 
ing.   And  said  loan  committee  are  charged 

.,    Al        ,  „  .    .  .  ,  ,  Duties  of 

with  the  duty  ot  supervising  said  loans  so   loan  com- 

;  .       5  mittees. 

as  to  maintain  the  margin  of  value  of  the 
collateral  security,  and  shall  demand  additional 
securities  to  make  good  any  depreciation  in  their 
value,  and  they  may  allow  withdrawals  and  substi- 
tutions of  securities  which  shall  not  diminish  the 
said  value. 

SEC.  11.    That  a  clearing  house  of  issue  shall  be 
authorized  and  empowered  to  receive  from  its  bank 
members,  gold  coin  of  the  United  States  of  full 
weight,    and    may    deliver   to  said   bank  u  g    old 
member  its  circulating  notes  at  the  par  acceptecut 
of  the  gold    coin    so  deposited,  and  the  Jote^bsued 
said  bank  member  shall  engage  to  redeem 
said  circulating  notes  at  all  times  when  called  upon 
to  do  so  by  the  association    issuing  them.     Such 
notes  may  be  issued  to  any  bank  member  in  ex- 
change for  gold  coin  without  regard  to  the  amount 


142  BILL    TO  PROTECT  CREDIT 

of  the  capital  stock  of  the  bank  depositing  the  gold 
coin.  The  clearing  house  of  issue  shall  make  re- 
port of  notes  so  issued  to  the  Comptroller  of  the 
Currency  and  shall  make  110  charge  for  the  issue 
of  its  notes  against  the  deposit  of  gold. 

Sec.  12.  That  in  order  to  furnish  suitable  notes 
Pre  aration  ^or  circulation,  as  provided  in  this  Act,  the 
Comptroller  of  the  Currency  is  hereby 
authorized  and  required,  under  the  direc- 
tion of  the  Secretary  of  the  Treasury,  to  cause  plates 
and  dies  to  be  engraved,  in  the  best  manner,  to 
guard  against  counterfeiting  and  fraudulent  altera- 
tions, and  to  have  printed  therefrom,  and  numbered, 
such  quantity  of  circulating  notes,  in  blank,  of  the 
denominations  of  one  dollar,  two  dollars,  five  dol- 
lars, ten  dollars,  twenty  dollars,  fifty  dollars,  one 
hundred  dollars,  five  hundred  dollars,  and  one 
thousand  dollars,  as  may  be  required  to  supply 
under  this  Act  the  associations  entitled  to  receive 
the  same,  which  notes  shall  express  upon 

What  note  ,   ,        . 

shall  ex-        their  race  that  they  are  secured  by  deposit 

with  the  clearing  house  of  issue  at  (nam- 

ing the  city)  of  commercial  assets  at  seventy-five 

per  centum  of  their  market  value,  and  that  said 

clearing  house  holds  said  assets  as  trustee  for  the 

note-holder  to  secure  their  payment,  which  payment 

is   guaranteed  by  the   associated    banks 

Payment  •> 

guaranteed     of  t}ie  United  States  through  any  clearing 

by  the  asso-  •> 

ofathe  uai?   house,  an(l  snall  he  attested  by  the  signa- 
any  tures   of  the   president   or  vice-president 


and  treasurer  of  said    clearing  house  of 
issue  as  for  account  of  the  bank  member  receiving 


THE  PROPOSED  BILL  143 

said  notes,  and  on  requisition  of  a  clearing  house 
of  issue  the  Comptroller  of  the  Currency 

Comptroller 

shall  forward  the  amount  of  blank  notes   shall  tarnish 

notes. 

in  denominations  as  called  for  as  may  be 
required  to  supply  the  bank   member  entitled  to 
receive  the  same  under  this  Act. 

SEC.  13.     That  after  any  such  clearing  house  of 
issue    shall  have  caused  its  promises    to  Notesfor 
pay  such  notes  on  demand  to  be  signed  by  ^w^eiva- 
the  president  or  vice-president  and  trea- 
surer thereof,  in  such  manner  as    to   make    them 
obligatory  promissory  notes,  payable   on  demand, 
such  clearing  house  of  issue  shall  deliver  them  to 
the  bank  member  entitled  to  receive  them,  who  is 
hereby  authorized  to  issue  and  circulate  the  same 
as  money,  and  the  same  shall  be  received  at  par  at 
all  the  clearing  houses  in  the  United  States  organ- 
ized under  this    Act,  and    said   clearing  Amountof 
house  of  issue  shall  thereupon  forward  to 
the  Comptroller  of  the  Currency  a  cer- 
tificate  setting  forth  the  amount  of  notes 
delivered,  the  name  of  the  bank  member 
receiving  same,  and  the  amount  of  the  collateral 
security  held  in  trust  for  their  redemption. 

SEC.  14.    That  it  shall  be  the  duty  of  the  clearing 
house  of   issue    to    receive    worn-out    or 

,  .  IT'  Worn  out  or 

mutilated  circulating  notes  issued  by  it  to  mutilated 

circulations. 

any  bank  member,  and  also,  on  due  proof 
of  the  destruction  of  any  such  circulating  notes, 
to  deliver  in  place  thereof  other  circulating  notes 
of  like  tenor  and  amount.     And  such  worn-out  or 
mutilated  notes,  after  a  memorandum  shall  have 


144  BILL    TO  PROTECT  CREDIT 

been  entered  in  the  proper  books,  as  may  be  estab- 
lished by  the  clearing  house  of  issue,  as  well  as  all 
circulating  notes  which  shall  have  been  paid  or  sur- 
rendered to  be  canceled,  shall  be  burned  to  ashes 
in  presence  of  three  persons,  one  to  be  appointed  by 
the  Comptroller  of  the  Currency,  one  by  the  clear- 
ing house  of  issue,  and  one  by  the  bank  member  on 
whose  account  they  were  issued,  and  a  certificate  of 
such  burning  shall  be  made  on  the  books  of  the 
clearing  house  of  issue,  and  duplicates  forwarded  to 
the  Comptroller  of  the  Currency  and  to  the  bank 
member  whose  notes  are  thus  canceled. 

SEC.  15.  That  it  shall  be  unlawful  for  any  officer 
Penalty  for  acting  under  the  provisions  of  this  Act  to 
Shivery1  countersign  or  deliver  to  any  association 
or  to  any  other  company  or  persons  any 
circulating  notes  contemplated  by  this  Act,  except 
as  hereinbefore  provided  and  in  accordance  with 
the  true  intent  and  meaning  of  this  Act.  Any 
officer  who  shall  violate  the  provisions  of  this  sec- 
tion shall  be  deemed  guilty  of  a  high  misdemeanor, 
and  on  conviction  thereof  shall  be  punished  by  fine 
not  exceeding  double  the  amount  so  countersigned 
and  delivered  and  imprisonment  not  less  than  one 
year  and  not  exceeding  fifteen  years,  at  the  discre- 
tion of  the  court  in  which  he  shall  be  tried. 

SEC.  16.  That  it  shall  be  lawful  for  any  such 
association  to  purchase,  hold,  and  convey 

Real  estate.  * 

real  estate  as  follows  :  — 

First.  Such  as  shall  be  necessary  for  its  imme- 
diate accommodation  in  the  transaction  of  its  busi- 
ness. 


THE  PROPOSED  BILL  145 

Second.  Such  as  shall  be  mortgaged  to  it  in  good 
faith  by  way  of  security  for  debts  previously  con- 
tracted. 

Third.  Such  as  shall  be  conveyed  in  satisfaction 
of  debts  previously  contracted  in  the  course  of  its 
dealings. 

Fourth.  Such  as  it  shall  purchase  at  sales  under 
judgment,  decrees,  or  mortgages  held  by  such  asso- 
ciation, or  shall  purchase  to  secure  debts  due  to 
said  association. 

Such  association  shall  not  purchase  or  hold  real 
estate  in  any  other  case  or  for  any  other  purpose 
than  as  specified  in  this  section,  nor  shall  it  hold 
the  possession  of  any  real  estate  under  mortgage, 
or  hold  the  title  and  possession  of  any  real  estate 
purchased  to  secure  any  debts  due  to  it  for  a  longer 
period  than  five  years. 

SEC.  17.  That  the  plates  and  special  dies  to  be 
procured  by  the  Comptroller  of  the  Cur- 

.  .  Control  of 

rency  for  the  printing  of  such  circulating  plates  and 
notes  shall  remain  under  his  control  and 
direction,  and  the  expense  necessarily  incurred  in 
executing  the  provisions  of  this  Act,  respecting  the 
procuring  of    such  notes    and    all    other  Expenses 
expenses  of  the  bureau,  shall  be  assessed 
each  year  upon  the  clearing  houses  organ- 
ized under  this  Act,  in  proportion  to  the  capital 
stock  of  their  members. 

SEC.  18.  That  the  Comptroller  of  the  Currency, 
with  the  approbation  of  the  Secretary  of 

Clearing 

the  Treasury,  as  often  as  shall  be  deemed  house 

**  ^v^wiir 

necessary  or  proper  or  at  the  request  of 


° 


examiners. 


146  BILL    TO  PROTECT  CREDIT 

any  clearing  house,  shall  appoint  a  suitable  person 
or  persons  to  make  an  examination  of  the  affairs 
of  every  association  organized  under  this  Act,  which 
person  shall  not  be  a  director  or  other  officer  in 
any  association  whose  affairs  he  shall  be  appointed 
to  examine,  and  who  shall  have  power  to  make  a 
thorough  examination  into  all  the  affairs  of  the 
association,  and  in  doing  so  to  examine  any  of 
the  officers  and  agents  thereof  on  oath,  and  shall 
make  a  full  and  detailed  report  of  the  condition 
of  the  association  to  the  Comptroller,  who  shall  fix 
the  compensation  for  his  services. 

SEC.  19.  That  every  president,  director,  trea- 
surer, teller,  clerk,  or  agent  of  any  asso- 
officiaimai-  ciation  who  shall  embezzle,  abstract,  or 
willfully  misapply  any  of  the  moneys, 
funds,  or  credits  of  the  association,  or  shall,  with- 
out authority  from  the  directors,  issue  or  put  in 
circulation  any  of  the  notes  of  the  association,  or 
shall,  without  such  authority,  assign  any  note, 
bond,  draft,  bill  of  exchange,  mortgage,  judgment, 
or  decree,  or  shall  make  any  false  entry  in  any 
book,  report,  or  statement  of  the  association  with 
intent  in  either  case  to  injure  or  defraud  the  asso- 
ciation, or  any  other  company,  body  politic  or  cor- 
porate, or  any  individual  person,  or  to  deceive  any 
officer  of  the  association,  or  any  agent  appointed 
to  examine  the  affairs  of  any  such  association,  shall 
be  deemed  guilty  of  a  misdemeanor,  and  upon  con- 
viction thereof  shall  be  punished  by  imprisonment 
not  less  than  five  nor  more  than  ten  years. 

SEC.  20.  That  every  person  who  shall  mutilate, 


THE  PROPOSED  BILL  147 

cut,  deface,  disfigure,  or  perforate  with  holes,  or 
shall  unite  or  cement  together,  or  do  any  other 
thing;  to  any  note  issued  by  any  such 

°.       .  J  Penalty  for 

association,  or  shall  cause  or  procure  the  mutilating 

.  T  currency. 

same  to  be  done,  with  intent  to  render  such 
note  unfit  to  be  reissued  by  said  association,  shall, 
upon  conviction,  forfeit  fifty  dollars  to  the  associa- 
tion who  shall  be  injured  thereby,  to  be  recovered 
by  action  in  any  court  having  jurisdiction. 

SEC.  21.  That  if  any  person  shall  falsely  make, 
forge,  or  counterfeit,  or  cause  or  procure  penaityfor 
to  be  made,  forged,  or  counterfeited,  or  Sgcircuia- 
willingly  aid  or  assist  in  falsely  making, 
forging,  or  counterfeiting,  any  note  in  imitation 
of,  or  purporting  to  be  in  imitation  of,  the  circu- 
lating notes  issued  under  the  provisions  of  this  Act, 
or  shall  pass,  utter,  or  publish,  or  attempt  to  pass, 
utter,  or  publish,  any  false,  forged,  or  counterfeited 
note,  purporting  to  be  issued  by  any  association 
doing  business  under  the  provisions  of  this  Act, 
knowing  the  same  to  be  falsely  made,  forged,  or 
counterfeited,  or  shall  falsely  alter,  or  cause  or  pro- 
cure to  be  falsely  altered,  or  willingly  aid  or  assist 
in  falsely  altering,  any  such  circulating  notes,  is- 
sued as  aforesaid,  or  shall  pass,  utter,  or  publish, 
or  attempt  to  pass,  utter,  or  publish,  as  true,  any 
falsely  altered  or  spurious  circulating  note  issued, 
or  purporting  to  have  been  issued,  as  aforesaid, 
knowing  the  same  to  be  falsely  altered  or  spurious, 
every  such  person  shall  be  deemed  and  adjudged 
guilty  of  felony,  and  being  thereof  convicted  by 
due  course  of  law  shall  be  sentenced  to  be  impris- 


148  BILL   TO  PROTECT  CREDIT 

oned  and  kept  at  hard  labor  for  a  period  of  not 
less  than  five  years  nor  more  than  fifteen  years, 
and  fined  in  a  sum  not  exceeding  one  thousand 
dollars. 

SEC.  22.  That  if  any  person  shall  make  or  en- 
Penaity  for  grave,  or  cause  or  procure  to  be  made  or 
JSSonor"  engraved,  or  shall  have  in  his  custody  or 
teSria°iffora"  possession  any  plate,  die,  or  block  after 

circulation.       ^   similitude    Qf    any  platej  ^ie,  Or  block 

from  which  any  circulating  notes,  issued  as  afore- 
said, shall  have  been  prepared  or  printed,  with 
intent  to  use  such  plate,  die,  or  block,  or  cause  or 
suffer  the  same  to  be  used,  in  forging  or  counter- 
feiting any  of  the  notes  issued  as  aforesaid,  or  shall 
have  in  his  custody  or  possession  any  blank  note  or 
notes  engraved  and  printed  after  the  similitude  of 
any  notes  issued  as  aforesaid,  with  intent  to  use 
such  blanks,  or  cause  or  suffer  the  same  to  be  used, 
in  forging  or  counterfeiting  any  of  the  notes  issued 
as  aforesaid,  or  shall  have  in  his  custody  or  posses- 
sion any  paper  adapted  to  the  making  of  such  notes, 
and  similar  to  the  paper  upon  which  any  such  notes 
shall  have  been  issued,  with  intent  to  use  such 
paper,  or  cause  or  suffer  the  same  to  be  used,  in 
forging  or  counterfeiting  any  of  the  notes  issued 
as  aforesaid,  every  such  person,  being  thereof  con- 
victed by  due  course  of  law  shall  be  sentenced 
to  be  imprisoned  and  kept  to  hard  labor  for  a 
term  not  less  than  five  or  more  than  fifteen  years, 
and  fined  in  the  sum  not  exceeding  one  thousand 
dollars. 

SEC.  23.   That  it  shall  be  the  duty  of  the  Comp- 


THE  PROPOSED  BILL  149 

troller  of  the  Currency  to  report  annually  to  Con- 
gress at   the  commencement   of   its  ses-     Annual 

report. 

sion  :  — 

First.  A  summary  of  the  operations  and  condi- 
tion of  every  association  from  whom  reports  have 
been  received  the  preceding  year,  at  the  several 
dates  to  which  such  reports  refer,  with  an  abstract 
of  the  whole  amount  of  their  debts  and  liabilities, 
the  amount  of  circulating  notes  outstanding,  and  the 
total  amount  of  means  and  resources,  specifying 
the  amount  of  lawful  money  held  by  them  at  the 
times  of  their  several  returns,  and  such  other  in- 
formation in  relation  to  said  associations  as  in  his 
judgment  may  be  useful. 

Second.  A  statement  of  associations  whose  busi- 
ness has  been  closed  during  the  year,  with  the 
amount  of  their  circulation  redeemed  and  amount 
outstanding. 

Third.  Any  amendment  to  the  laws  relative  to 
clearing  houses,  by  which  the  system  may  be  im- 
proved, and  the  security  of  the  holders  of  their 
notes  may  be  increased. 

Fourth.  The  whole  amount  of  the  expenses  of 
carrying  out  the  provisions  of  this  Act.  And  such 
report  shall  be  made  by  or  before  the  first  day  of 
December  in  each  year,  and  the  usual  number  of 
copies,  for  the  use  of  the  Senate  and  House,  and 
one  thousand  for  the  use  of  the  Department,  shall 
be  printed  by  the  Public  Printer  and  in  readiness 
for  distribution  at  the  first  meeting  of  Congress. 

SEC.  24.  That  the  clearing  houses  organized 
under  this  Act  may  organize  among  themselves 


150  BILL    TO  PROTECT  CREDIT 

associations  to  include  the  bank  members  thereof 
iu  any  State  or  district  and  may  hold 

baukers;  annual  conventions  and  meetings  at  other 
times,  for  the  formulation  of  rules  and 

regulations  for  the  conduct  of  their  affairs  and  for 

o 

the  discussion  of  financial  subjects  and  for  the 
preservation  and  exchange  of  information  to  gov- 
ern the  granting  of  credits,  and  when  approved 
by  the  Secretary  of  the  Treasury,  such  rules  and 
regulations  shall  be  binding  upon  the  banks  and 
clearing;  houses  within  said  State  and  district. 

o 

SEC.  25.    That  clearing  houses  organized  under 

this  Act  may  form  a  national  association, 

bankers'        which  shall  meet  in  convention  annually, 

association. 

and  whose  object  shall  be  the  promotion 
of  the  interests  of  the  banks  of  the  United  States 
receiving  the  benefits  of  this  Act,  and  said  conven- 
tion may  pass  rules  and  regulations  to  govern  the 
operations  of  clearing  houses  and  the  banks  con- 
nected with  same,  which,  when  approved  by  the 
Secretary  of  the  Treasury,  shall  be  binding  upon 
such  clearing  houses.  The  delegates  to  a  State  or 
district  convention  shall  number  one  hundred,  and 
to  a  general  convention  three  hundred,  which  num- 
bers divided  into  the  aggregate  of  the  banking  cap- 
ital represented  will  give  in  each  case  the  amount 
of  capital  to  be  taken  as  the  basis  of  representation. 
The  Comptroller  of  the  Currency  may  unite  banks 
into  voting  groups  where  their  separate  capital  is 
below  the  basis  of  representation,  and  each  group 
shall  be  entitled  to  one  representative.  All  elec- 
tions of  representatives  to  conventions  shall  be  by 


THE  PROPOSED  BILL  151 

a  majority  vote  of  the  directors  entitled  to  vote  of 
single  banks  and  banks  composing  groups  ;  each 
bank  shall  have  a  vote  equal  to  the  minimum  num- 
ber of  directors  allowed  to  it  by  law  ;  but  no  bank 
shall  be  allowed  more  votes  than  shall  be  given  to  a 
national  bank,  and  no  bank  shall  have  more  than 
one  representative  in  the  national  association. 


XI 

k 

THE  COMPLETION  OF  THE  NATIONAL  BANKING 

SYSTEM  i 

THE  INCORPORATION  OF  CLEARING  HOUSES  UNDER 
UNITED  STATES  CHARTERS,  WITH  ADDITIONAL  POW- 
ERS AND  DUTIES  ;  AND  THE  ISSUE  OF  A  CLEARING 
HOUSE  CURRENCY,  AS  A  MEANS  OF  PREVENTING 
MONEY  PANICS 

THE   PANIC    OF    1893   A   TEST   PERIOD. 

THE  system  of  banking  prevailing  in  this  coun- 
try under  the  laws  of  Congress  is  now  passing 
through  a  test  period.  A  test  involves  a  strain 
greater  than  is  required  for  work  done  under  ordi- 
nary conditions.  No  system  can  be  considered  per- 
fect which  breaks  down  when  put  to  the  test.  Our 
banking  laws  on  the  one  hand  invite  the  invest- 
ment of  capital  in  a  business  which  is  intended  to 
be  so  surrounded  by  legal  safeguards  that  the  risk 
is  supposed  to  be  small  to  those  who  act  strictly 
within  the  provisions  of  the  law.  On  the  other 
hand,  the  law  invites  the  people  to  deposit  their 
money  with  the  banks  because  the  safeguards  are 
assumed  to  be  sufficient  for  their  protection.  Ex- 
perience has  shown  that  under  ordinary  conditions 
our  national  banking  system  works  well  and  shows 
no  appearance  of  defective  theories,  but  that  under 

1  Reprinted  from  the  Bankers'  Magazine,  September,  1893. 


A  LACK  OF  CONFIDENCE  153 

the  stress  of  severe  and  protracted  strain  it  fails 
unmistakably  to  accomplish  some  of  the  results  for 
which  it  was  designed. 

NATIONAL   BANKING    ACT   AFFORDS   INSUFFICIENT 

PROTECTION. 

The  present  financial  disturbance  is  marked  by 
one  distinguishing  characteristic,  which  is  a  lack 
of  confidence  both  on  the  part  of  the  banks  and 
of  depositors  in  the  provisions  of  the  law  for  their 
protection.  And  this  lack  of  confidence  is  well 
founded.  A  bank  conducted  in  strict  compliance 
with  the  law  as  to  reserves  and  investments,  and 
honestly  and  prudently  managed,  with  not  a  sin- 
gle weak  asset  on  its  books,  could  not  hope  to 
withstand  successfully  unusual  demands  like  those 
of  the  past  few  weeks  without  outside  assistance. 
The  perception  of  this  fact  by  the  depositing  pub- 
lic was  enough  to  produce  a  money  panic.  Bank 
officers  and  the  public  alike  see  that  the  ordinary 
provisions  of  the  law  are  inadequate  to  protect 
either  the  capital  invested  under  the  sanction  of  the 
law  and  in  compliance  therewith,  or  the  depositors 
who  rely  thereon.  The  panic  is  therefore  rational, 
for  it  is  based  on  facts  which  justify  it.  Numerous 
suspensions  and  failures  have  taken  place  by  which 
depositors  will  not  ultimately  lose  anything,  be- 
cause the  banks  are  said  to  be  sound  and  well 
managed.  Here,  then,  we  have  loss  of  credit,  dis- 
tress, derangement  of  business,  and  every  evil  which 
can  come  from  a  bank  failure  or  suspension,  ex- 
cept loss  to  depositors  ;  and  yet  there  has  been  no 


154     COMPLETION  OF  BANKING  SYSTEM 

infringement  of  the  law,  or  business  mistakes,  or 
even  errors  of  judgment.  Though  there  were  none 
of  these,  and  the  compliance  with  the  law  has  been 
perfect,  yet  the  result  has  been  disaster. 

A  WELL-SECUKED    KESERVE   SHOULD    BE   PKOVIDED 

BY   LAW. 

It  is,  therefore,  a  matter  of  common  honesty  and 
fair  dealing  with  the  stockholders  of  national  banks 
to  change  the  provisions  of  the  law  so  that  even  un- 
der the  stress  of  the  greatest  strain  that  can  be  im- 
agined, it  shall  be  sufficient  for  their  complete  and 
perfect  protection.  It  is  an  exceedingly  simple  and 
easy  matter  to  accomplish  this ;  but  it  is  not  at  all 
simple  to  do  so  in  a  way  that  will  leave  the  banks 
in  a  position  to  earn  a  fair  return  upon  their  capital. 
If  the  reserve  limit  were  raised  to  75  per  cent.,  all 
to  be  kept  in  the  bank's  own  vaults,  we  should  of 
course  hear  no  more  of  bank  failures.  But  under 
such  a  restriction  most  banks  would  retire  from 
business,  because  it  would  thereby  be  made  unpro- 
fitable. To  maintain  such  a  large  amount  of  capi- 
tal in  perpetual  idleness  would  entail  a  great  loss 
of  productive  power  to  the  community.  It  would 
be  like  the  policy  of  keeping  a  large  standing  army 
at  all  times,  instead  of  a  militia  which  can  be  called 
out  when  needed.  What  is  wanted  is,  therefore, 
not  more  idle  capital,  but  a  well-secured  reserve 
which  can  be  relied  on  in  case  of  necessity,  and  can 
be  retired,  when  it  has  rendered  its  service,  leaving 
the  small  regular  reserves  on  duty  on  a  peace  foot- 
ing. This  is  the  application  to  business  affairs  of 


CLEARING  HOUSE   CERTIFICATE        155 

the  methods  which  have  been  found  both  economical 
and  effective  in  the  government  of  a  State. 

INCORPORATION    OF   CLEARING   HOUSES    UNDER    A 

FEDERAL    LAW. 

The  banks  of  New  York  city  have  established  a 
mode  of  meeting  a  crisis  which  is  at  once  effective 
and  simple,  by  the  use  of  clearing  house  certificates. 
These  certificates  form  a  currency  among  the  mem- 
bers of  the  clearing  house  which  is  accepted  by 
them  in  payment  of  debts  due  each  other.  It  is  only 
necessary  to  legalize  and  extend  that  which  is  now 
done  extra-legally,  to  afford  instant  relief  to  the 
whole  banking  and  business  community.  This  could 
be  accomplished  by  a  law  in  Congress  incorporating 
clearing  houses.  These  institutions  are  a  necessary 
part  of  the  national  banking  system,  and,  as  such, 
they  should  have  a  uniform  method  of  operation, 
and  derive  their  powers  from  the  national  gov- 
ernment. All  the  national  banks  in  the  country 
might  be  included  in  clearing  house  districts,  and 
banks  organized  under  state  laws  might  also  be 
members.  All  their  powers  and  privileges  would 
be  specified  and  regulated  by  the  .law,  and  among 
these  should  be  the  power  to  issue  clearing  house 
legal  tenders.  This  power  should  be  limited  to  those 
whose  clearings  were  the  largest,  say  $500,000,000 
per  annum  or  over.  These  clearing  house  legal 
tenders  should  not  only  be  a  currency  between 
banks  but  for  the  people  as  well.  They  should  be 
a  legal  tender  for  the  payment  of.  debts  at  all  clear- 
ing houses,  thus  maintaining  them  at  par  through- 


156    COMPLETION  OF  BANKING  SYSTEM 

out  the  whole  country ;  and  they  should  be  counted 
by  banks  holding  them  as  part  of  their  reserves. 
The  amount  of  the  reserve  provided  for  by  the 
clearing  house  legal  tenders  should  be  large  enough 
to  make  the  provision  adequate  for  all  possible 
requirements.  The  present  legal  reserve  is  25  per 
cent.,  and  the  maximum  of  the  reserve  thus  pro- 
vided should  be  25  per  cent.  more.  The  banks 
would  thus  possess  a  reserve  of  50  per  cent,  im- 
mediately available,  of  which  25  per  cent,  would 
be  active  and  25  per  cent,  latent,  but  ready  to  come 
into  existence  at  short  notice.  A  50  per  cent,  re- 
serve would  be  sufficient  to  meet  and  overcome  the 
severest  panics  this  country  has  known.  The  effect 
of  the  possession  of  this  power  by  the  banks  would 
necessarily  be  that  the  danger  of  a  money  panic 
would  be  forever  removed.  The  power  to  make 
such  issues  would  stamp  out  forever  the  fear  that  a 
crisis  would  or  might  occur  when  the  banks  would 
not  have  enough  money  to  "  go  around."  The 
power  to  produce  disaster  by  hoarding  currency, 
which  is  now  possessed  by  timorous  or  evil-minded 
men,  would  be  forever  taken  away. 

SECURITY   FOE    CLEARING    HOUSE    CURRENCY. 

These  new  legal  tenders  would  be  secured,  as 
clearing  house  certificates  now  are,  by  pledge  of 
bank  assets  at  75  per  cent,  of  their  value,  and 
guaranteed  by  all  the  banks  of  all  the  clearing 
houses,  the  members  of  each  clearing  house  being 
the  first  guarantors  of  their  own  issues.  They 
would  be  issued  in  conformity  to  the  financial  prin- 
ciple recognized  by  all  authorities,  and  well  stated 


PANICS  AVOIDED  157 

by  Charles  Moran  in  his  book  on  "  Money  "  (1863), 
page  110,  as  follows :  "  Paper  money  to  perform 
successfully  the  functions  of  money  should  never 
be  issued  except  against  a  pledge,  direct  or  indi- 
rect, of  a  greater  value  of  useful  commodities, 
needed  by  the  community,  applicable  to  the  redemp- 
tion of  the  bank  notes  issued."  A  six  per  cent, 
rate  of  interest  to  banks  taking  clearing  house 
legal  tenders  would  act  as  a  check  upon  their  issue, 
and  they  would  not  be  taken  so  much  for  profit  as 
for  protection  and  necessity.  The  interest  on  the 
notes  of  the  banks  applying  for  the  currency  would 
accrue  to  the  clearing  houses  to  form  a  fund  to 
meet  such  obligations  as  they  might  have.  Such 
legal  tenders  would  be  intended  to  perform  a  tem- 
porary service,  and  provision  should  be  made  for 
the  comptroller  to  call  for  their  retirement  in 
installments  of  a  certain  percentage  at  specified 
times.  The  time  they  should  be  allowed  to  remain 
out  might  extend  over  six  to  nine  months  to  permit 
settlements  to  be  made  and  other  liquidations  from 
sales  of  securities,  produce,  and  merchandise.  If 
cash  for  their  redemption  was  not  provided  by  the 
borrowing  banks,  or  by  sale  of  the  assets  pledged, 
then  the  resulting  loss  should  be  assessed  first  on 
the  banks  in  the  districts  making  the  issues,  and 
thereafter  on  all  national  banks  in  proportion. 

IMMUNITY    FROM    PANIC. 

Immunity  from  the  disasters  which  result  from  a 
money  panic  is  a  protection  demanded  by  justice, 
and  should  be  given  by  law  to  the  banking  corpo- 
rations which  the  law  creates.  As  the  experience 


158     COMPLETION  OF  BANKING  SYSTEM 

of  every  panic  proves  that  the  present  provisions  of 
the  banking  law  are  inadequate  to  give  that  pro- 
tection, then  whatever  remedy  experience  shows  is 
effective  should  be  incorporated  in  the  law.  The 
experience  of  New  York  in  the  use  of  clearing 
house  certificates  shows  that  they  are  effective  and 
safe  in  their  final  results. 

THE    ENTIRE    COUNTRY    INTERESTED    IN    STABILITY. 

It  is  to  be  remembered  that  such  measures  have 
their  effect,  not  onlv  on  national  banks,  but  also  on 

mt 

all  the  financial  interests  of  the  country  which  rest 
upon  the  deposit  banks  as  their  foundation.  The 
deposit  banks  are  the  great  balance  wheel  of  the 
country.  On  their  orderly  movement  depends  in  a 
great  measure  the  safety  of  the  savings  banks  and 
the  commercial  community.  The  present  disturb- 
ance has  thus  far  affected  only  the  deposit  banks, 
but  if  not  arrested  it  may  extend  to  the  depositors 
in  savings  banks.  If  these  are  seized  with  any 
unreasoning  fear,  which  now  may  be  brewing,  and 
the  burden  of  providing  for  ten  per  cent,  of  these 
deposits,  or  even  a  hundred  millions  of  them,  be 
added  to  present  requirements,  it  is  evident  that  a 
general  collapse  and  prostration  of  the  entire  busi- 
ness interests  of  the  nation  might  ensue. 

The  entire  community  is  therefore  interested  in 
any  attempt  to  perfect  and  complete  the  national 
banking  system,  because  in  proportion  as  such 
efforts  are  successful  the  material  interests  of  the 
whole  country  are  promoted. 
NEAV  YORK,  July  25,  1893. 


XII 

FIXED  AND  REDEEMABLE  CURRENCY  1 
FUNDAMENTAL   PRINCIPLES  MUST  BE  ESTABLISHED. 

THE  present  discussion  of  the  currency  ques- 
tion cannot  be  brought  to  a  satisfactory  conclusion 
until  an  agreement  is  reached  as  to  fundamental 
principles.  The  following  pages  are  written  with  a 
desire  to  bring  about  such  an  agreement,  and  thus 
to  make  concerted  action  possible. 

METAL  AND  PAPER  CURRENCY. 

There  are  two  materials  used  as  currency,  metal 
and  paper.  Metal  currency  may  be  called  fixed, 
because  when  the  precious  metals  are  minted  into 
coins,  they  become  practically  fixed  and  permanent 
in  shape  and  value.  They  do  not  rust,  they  do  not 
lose  their  value  in  fire,  and  the  process  of  abrasion 
is  so  slow  that  it  proves  their  permanent  character. 
Paper  currency  from  its  nature  must  be  redeem- 
able, for  fire  consumes  it,  water  dissolves  it,  attri- 
tion destroys  it,  and  age  fades  it.  Being  of  a 
perishable  character  and  of  no  intrinsic  worth,  its 
value  must  be  found  in  that  by  which  it  is  to  be 

redeemed. 

• 
1  Reprinted  from  the  Bankers'  Magazine,  October,  1893. 


160      FIXED  AND  REDEEMABLE   CURRENCY 
FIXED   AND   REDEEMABLE   CURRENCY. 

Currency  is  therefore  naturally  and  truly  divided 
into  two  classes,  fixed  and  redeemable. 

FIXED    CURRENCY. 

Fixed  currency  is  exchangeable,  but  not  redeem- 
able, unless  exchange  be  considered  a  form  of  re- 
demption. It  is  exchangeable  because  it  has  intrin- 
sic value,  and  every  act  of  exchange  is  a  renewed 
confirmation  of  its  value.  There  can  be  but  one 
measure  of  value,  and  the  metal  least  liable  to  fluc- 
tuate is  the  best  for  that  use.  The  metal  has  cost  a 
certain  amount  of  labor  to  mine  and  mint,  and  that 
is  the  measure  of  its  value. 

The  precious  metals  when  coined  have  three 
characteristics.  They  are  currency,  capital,  and 
commodity  :  currency,  because  they  are  accepted 
in  exchanges  at  a  certain  value  that  is  stamped 
upon  them  ;  capital,  because  they  are  the  produce 
of  industry  which  may  be  used  in  facilitating  pro- 
duction; and  a  commodity,  because  they  have  what 
is  called  intrinsic  value.  All  these  three  qualities 
are  present  in  fixed  currency  at  all  times,  but  when 
effecting  exchanges,  it  is*  capital  and  commodity 
used  as  currency  ;  when  held  as  reserve,  it  is  a  cur- 
rency and  a  commodity  used  as  capital ;  when  want- 
ed for  neither  purpose,  it  is  a  currency  and  capital 
which  can  only  be  used  as  a  commodity.  The  laws 
of  trade,  which  are  superior  to  and  cannot  be  con- 
trolled by  the  laws  of  either  states  or  nations,  de- 
termine how  much  fixed  currency  is  needed  for 


METAL   COINED  161 

effecting  exchanges,  how  much  as  capital,  and  what 
amount  is  only  a  commodity.  The  law  of  parsi- 
mony fixes  the  first  two  amounts  at  the  smallest 
which  will  perform  the  required  services,  and  the 
last  at  the  largest  amount  which  can  be  spared, 
because  it  is  idle  capital.  As  business  is  the  mind 
and  muscle  of  man  engaged  in  productive  labor,  the 
endeavor  is  to  keep  labor  and  the  results  of  labor 
in  active  operation.  Idle  capital  is  therefore  as 
abhorrent  to  a  business  man  as  a  vacuum  has  been 
said  to  be  to  nature.  If  idle  capital  in  the  shape 
of  fixed  currency  cannot  be  employed  at  home,  it 
is  sure  to  be  exported  for  the  payment  of  foreign 
debts,  or  for  investment  in  home  or  foreign  securi- 
ties. The  coins  held  by  individuals  and  banks  are 
merely  a  convenience  in  effecting  exchanges  and 
paying  debts,  domestic  and  foreign.  No  one  wants 
more  coins  than  are  sufficient  for  these  purposes. 
If  one  has  more,  he  immediately  seeks  methods  of 
exchanging  them  for  some  form  of  productive 
capital. 

THE   AMOUNT    OF  FIXED  CURRENCY  REGULATED  BY 
THE   LAWS    OF    TRADE. 

As  the  amount  of  fixed  currency  in  a  country  is 
therefore  regulated  by  certain  immutable  laws,  any 
variation  either  in  the  direction  of  enforced  scarcity 
or  of  redundance  is  sure  to  produce  the  bad  results 
which  invariably  follow  the  infraction  of  natural 
laws.  If  the  coin  is  debased,  it  will  drive  out  of 
the  country  the  coin  which  has  greater  value  but  is 
stamped  as  of  equal  value  with  it.  If  a  larger 


162     FIXED  AND  REDEEMABLE   CURRENCY 

amount  is  coined  than  is  required,  the  surplus  will 
surely  flow  abroad. 

The  needs  of  one  country  vary  from  those  of 
another.  Great  extent  of  territory,  distance  of 
financial  centres  from  each  other,  wealth  of  inhab- 
itants per  capita,  activity  of  business  operations, 
nature  of  business  done,  and  other  considerations, 
all  go  to  determine  the  amount  of  fixed  currency 
needed  by  a  country.  While  good  estimates  may 
be  made  as  to  the  amount  required,  only  the  needs 
of  the  people  as  developed  and  ascertained  by 
actual  business  can  fix  the  limit ;  the  method  is 
practical,  not  theoretical.  If  there  is  too  little 
currency,  the  country  will  call  loudly  for  more.  If 
there  is  too  much,  it  will  ship  the  surplus  abroad. 

FIXED    CURRENCY    IS    "SOUND." 

Fixed  currency  has  the  great  advantage  over 
every  other  form  in  that  there  is  no  question  as  to 
its  "  soundness."  It  is  tangible,  and  makes  no 
appeal  to  the  confidence  of  the  user.  An  illiterate 
man  or  a  savage  knows  that  it  is  good  when  he 
sees  it. 

PAPER   CURRENCY   RESTS    ON    CONFIDENCE. 

Paper  currency,  on  the  contrary,  rests  entirely 
on  the  confidence  of  the  community.  It  is  a  cur- 
rency, because  it  is  accepted  at  the  value  printed 
upon  it,  and  it  represents  capital  and  commodities. 
It  differs  from  metal  currency  in  that  it  is  repre- 
sentative and  redeemable.  Being  representative, 
it  is  a  convenient  and  cheap  substitute  for  metal  ; 


COIN  AND  PAPER  MONEY  163 

being  redeemable,  it  need  never  be  idle.  When  it 
has  performed  its  service  and  has  no  more  work  to 
do,  it  can  be  redeemed  and  canceled.  It  is  a  pro- 
mise to  pay,  and  making  no  pretense  to  intrinsic 
worth,  its  whole  value  lies  in  the  credit  of  the  issuer 
and  in  the  value  of  the  property  pledged  to  secure 
its  payment.  But  being  so  economical,  serviceable, 
portable,  and  convenient,  all  civilized  communities 
find  its  use  in  some  form  a  commercial  necessity. 

PAPER  CURRENCY  MAY  BE  COVERED  WITH  COIN. 

Paper  may  be  issued  on  the  deposit  of  an  equal 
amount  of  coin,  in  which  case  its  only,  but  very 
great  advantage,  is  its  portability.  Paper  of  this 
kind  is  in  all  points  similar  to  metal  currency,  and 
is  governed  by  the  same  laws. 

PAPER    CURRENCY   MAY    BE    SECURED    BY    BONDS. 

Paper  currency  may  be  issued  against  pledge  of 
government  bonds,  as  our  present  national  bank 
currency  is,  in  which  case  it  releases  the  capital 
invested  in  such  bonds  before  the  date  of  their 
maturity.  As  this  operation  gives  a  small  profit  to 
the  banks,  they  become  purchasers  of  these  bonds 
and  sustain  their  price  in  times  of  commercial 
depression  or  in  a  time  of  war.  The  national 
banking  currency  therefore  simply  anticipates  the 
payment  of  the  bonds  issued  by  the  government. 
When  the  bonds  mature  and  are  paid,  then  gold 
will  take  the  place  of  the  national  bank  notes,  and 
the  volume  of  the  currency  will  to  that  extent 
only  change  its  form,  and  not  necessarily  be  dimin- 


164      FIXED  AND  REDEEMABLE   CURRENCY 

islied  in  amount  by  the  disappearance  of  the  bank 
notes.  The  payment  of  the  bonds  by  the  govern- 
ment in  gold  at  their  maturity  would  ordinarily  be 
a  stimulus  to  business,  but  having  discounted  the 
bonds,  we  have  eaten  our  cake,  and  manifestly  we 
cannot  have  it  at  the  same  time. 

BENEFITS    OF    NATIONAL    BANK    CURRENCY    THREE- 
FOLD. 

The  national  currency  is  therefore  a  benefit  to 
the  government  in  providing  a  purchaser  for  its 
bonds,  a  benefit  to  the  banks  in  giving  them  a 
profit  on  the  circulation,  and  a  benefit  to  the 
country  in  discounting  the  payment  of  the  bonds. 
There  is  no  necessity  to  provide  a  substitute  for 
national  banking  currency,  as  we  often  hear  urged. 
The  government  provides  the  substitute  in  the  gold 
with  which  it  will  pay  the  bonds.  The  money  will 
go  into  the  hands  of  the  United  States  Treasurer 
to  redeem  the  national  banking  currency,  any  sur- 
plus will  go  to  the  banks,  the  profit  on  currency 
will  cease  with  the  stoppage  of  interest  on  the 
bonds,  and  the  bond-currency  transaction  will  be 
closed.  It  will  have  served  an  excellent  purpose 
and  have  been  a  great  benefit  to  all  parties  con- 
cerned. 

It  is  evident  that  such  a  currency  transaction  as 
this  is  a  special  one,  and  cannot  be  repeated  until 
the  government  shall  again  need  the  aid  of  the 
banks  in  floating  its  bonds,  which  event  we  may 
hope  will  never  recur. 


FIAT  CURRENCY  165 

GOVERNMENT  NOTES  A  FORM   OF  FIXED  CURRENCY. 

Government  or  "fiat ':  notes  are  a  form  of  fixed 
currency,  and  as  such  should  be  instantly  convert- 
ible into  coin.  If  they  are  not,  the  measure  of 
value  becomes  a  fluctuating  one,  which  is  inconsist- 
ent with  commercial  integrity.  "  Divers  weights 
are  an  abomination  unto  the  Lord."  The  govern- 
ment can  legally  issue  its  fixed  currency,  but  it  is 
morally  bound  to  keep  it  at  par  with  coin,  and  its 
function  is  rather  to  regulate  the  currency  than  to 
issue  it  for  a  profit.  The  proposition  that  the  gov- 
ernment shall  issue  all  the  currency  is  one  that 
cannot  be  entertained  or  discussed.  The  debate 
on  this  subject  was  closed  a  hundred  years  ago,  and 
since  then  all  have  been  ready  for  "  the  question." 
It  must  be  simply  voted  down.  The  minority  in 
favor  of  a  "fiat'  currency  is  too  small  to  make  it 
a  live  issue. 

REDEEMABLE   CURRENCY. 

From  the  foregoing  it  appears  that  paper  cur- 
rency issued  against  deposit  of  precious  metals  or 
government  bonds,  and  government  "  fiat  "  notes, 
are  only  other  forms  of  fixed  currency.  The  paper 
represents  either  a  dollar  of  coin  or  the  promise 
of  the  government  to  pay  a  dollar  at  some  future 
time. 

PAPER    CURRENCY  ISSUED  ON  COMMERCIAL  ASSETS. 

We  have,  therefore,  thus  far  been  considering 
fixed  currency  only,  in  the  form  of  metal  coins, 


1G6      FIXED  AND  REDEEMABLE   CURRENCY 

paper  issued  against  metal,  and  paper  issued  against 
the  government  promise  to  pay  coin.  If,  however, 
paper  can  be  issued  with  advantage  against  pledge 
of  coin  or  government  bonds  for  its  redemption, 
why  cannot  it  be  issued  against  other  commodities 
and  securities  which  have  a  recognized  value  and 
which  in  ordinary  process  of  business  will  find  a 
market,  be  exchanged  for  money,  and  thus  provide 
the  cash  with  which  to  redeem  the  paper  money 
which  has  been  issued  against  the  commodities  and 
securities  ?  Is  silver  or  gold  any  safer  as  a  secur- 
ity for  currency  than  other  products  of  the  mine, 
copper,  iron,  lead,  petroleum,  and  coal ;  or  than 
agricultural  products,  wheat,  corn,  and  cotton ;  or 
than  manufactured  goods,  flour,  provisions,  and  cot- 
ton goods ;  or  than  the  stocks  and  bonds  of  munici- 
palities and  corporations  whose  credit  is  unques- 
tioned ;  or  than  the  bills  receivable  of  business  firms 
and  corporations  which  represent  and  are  based 
upon  all  these  commodities  and  securities  ?  It  is 
evident  that  if  the  government  should  experience 
an  important  benefit  from  the  monopoly  of  the 
banking  currency  of  the  country,  then  these  other 
varied  interests  represented  by  the  products  of 
labor  would  receive  a  corresponding  benefit  if  they 
could  by  any  means  be  used  as  the  basis  for  the 
issue  of  currency. 

SAFEGUARDS    REQUIRED. 

But  when  the  issue  of  paper  currency  against 
the  pledge  of  other  forms  of  property  than  the  pre- 
cious metals  or  government  securities  is  proposed, 


SAFETY  FUNDAMENTAL  167 

immediately  many  considerations  arise  which  did 
not  before  require  attention. 

The  chief  consideration,  which  lies  at  the  foun- 
dation of  the  reluctance  of  the  public  to  commit  it- 
self to  any  particular  currency  measure,  is  that  the 
country  demands  that  its  currency  shall  be  safe 
and  worthy  of  confidence  not  only  at  home  but 
throughout  the  world.  Public  opinion  will  not  tol- 
erate any  doubt  on  this  subject,  and  it  is  unwilling 
to  take  chances  in  connection  with  it.  Any  scheme 
which  is  proposed  must  therefore  be  able  to  stand 
all  the  tests  which  ingenuity  and  experience  can 
bring  to  bear  against  it. 

THE  FUNCTION  OF  PAPER  CURRENCY  TO  EFFECT 

EXCHANGES. 

The  function  of  a  redeemable  paper  currency  is 
to  effect  exchanges  and  not  to  supply  a  medium  of 
intrinsic  value.  Such  a  system  is  only  a  machine 
for  effecting  exchanges.  It  must  first  be  safe,  or 
it  will  be  useless.  The  idea  of  safety  is  fundamen- 
tal, but  we  must  first  say  a  word  regarding  its 
nature  and  functions. 

MUST   THEN    BE    BASED    ON    COMMODITIES   TO    BE 

EXCHANGED. 

If  a  redeemable  paper  currency  is  used  to  effect 
exchanges,  then  it  should  be  based  on  the  commod- 
ities which  are  to  be  exchanged,  and  the  closer  it 
can  be  brought  under  the  control  of  the  banks 
through  whom  the  exchanges  are  effected,  and  the 
nearer  it  can  be  made  to  conform  to  the  wants  of 


168      FIXED  AND  REDEEMABLE   CURRENCY 

business  men  who  effect  the  exchanges,  the  more 
serviceable  and  efficient  does  the  machine  become. 
Exchangeability  or  convertibility,  then,  should  be 
the  test  of  property  to  be  used  as  a  basis  for  a 
redeemable  circulation.  As  the  notes  are  demand 
obligations,  quick  convertibility  is  also  an  absolute 
requirement  in  all  collaterals  pledged  for  an  issue 
of  bank  notes.  This  requirement  would  exclude 
real  estate  and  all  other  slow  assets  which  are  suffi- 
ciently provided  for  by  the  money  of  savings  banks 
and  trust  estates. 

PAPER  CURRENCY  MUST  BE  SAFE. 

If  a  redeemable  currency  would  be  beneficial  to 
the  business  of  the  country  and  to  the  debtor  class, 
and  if  it  may  properly  be  based  upon  bankable 
assets,  the  remaining  requirements  are  that  any 
scheme  for  its  issue  shall  be  safe  beyond  contin- 
gency, and  that  the  currency  shall  be  maintained 
over  the  whole  country  at  par. 

HOW    SAFETY    MAY    BE    ATTAINED. 

These  two  points  would  be  secured  by  adopting 
as  a  model  the  main  features  of  the  certificates  is- 
sued by  the  New  York  Clearing  House.  The  mode 
of  their  issue  is  the  result  of  the  experience  of  the 
officers  of  banks  which  do  a  large  business  and  are 
managed  conservatively.  They  endeavored  to  pro- 
duce in  these  certificates  as  strong  a  security  as 
the  banks  of  New  York  could  make.  There  was 
to  be  no  possibility  of  doubt  or  chance  of  difficulty 
in  connection  with  them.  If,  therefore,  such  a 


ELEMENTS  OF  STRENGTH  169 

system  could  be  extended  over  the  whole  country, 
it  would  furnish  a  currency  as  strong  as  the  united 
banks  of  the  country  could  make.  It  is  not  easy 
to  conceive  of  a  stronger  currency  than  one  issued 
under  the  supervision  of  clearing  houses  to  the 
banks  which  are  their  accredited  members,  under 
restrictions  and  regulations  imposed  by  a  law  of 
Congress. 

FIVE   ELEMENTS    OF    STRENGTH    IN    CLEARING 
HOUSE   CURRENCY. 

Let  us,  therefore,  inquire  what  are  the  elements 
of  strength  in  these  certificates,  and  from  that  will 
appear  what  would  be  the  strength  of  a  currency 
issued  in  like  manner. 

BASED    ON   THE   BUSINESS   OF   THE    COUNTRY. 

First.  Clearing  house  certificates  are  based  pri- 
marily on  the  notes  of  the  customers  of  the  banks, 
which  are  the  underlying  obligations  that  the  banks 
take  in  making  a  discount.  One  of  these  notes 
represents  the  entire  responsibility  of  the  customer, 
and  it  is  a  lien  on  his  stock  in  trade.  Usually  this 
is  fortified  also  by  indorsements  or  a  pledge  of  col- 
lateral. The  loans  and  notes  held  by  banks,  there- 
fore, represent  the  business  and  property  of  the 
borrowers  of  the  country,  and  each  should  have 
behind  it  a  large  margin  of  property.  The  safety 
of  these  obligations  is  shown  by  the  good  dividends 
declared  by  the  banks  as  the  result  of  the  business 
of  lending  and  discounting.  They  represent  the 
active  business  men  and  the  commercial  enterprises 
of  the  country. 


170      FIXED  AND  REDEEMABLE   CURRENCY 
ISSUED    AT    75    PER    CENT.    OF    COLLATERAL. 

Second.  The  second  element  of  strength  in  these 
certificates  is  that  they  are  issued  to  banks  only,  at 
75  per  cent,  of  the  par  value  of  the  notes  and  other 
securities  pledged.  The  collateral  to  the  certifi- 
cates is  thus  strengthened  by  the  equivalent  of  two 
more  names,  the  bank  making  the  pledge  and  the 
margin  of  25  per  cent.  At  this  stage  the  security 
may  be  considered  equal  to  four-name  paper,  each 
name  being  strong  and  separate. 

Proposals  that  banks  should  give  security  for 
their  issues  have  been  discussed  for  fifty  years. 
The  principle  has  been  the  foundation  of  our  na- 
tional banking  currency,  is  an  essential  feature  of 
clearing  house  certificates,  and  should  be  incorpo- 
rated in  whatever  new  currency  system  is  estab- 
lished hereafter.  McCulloch  l  writes  in  an  interest- 
ing discussion,  which  is  closely  applicable  to  the 
present  times  :  "  Had  this  principle  been  adopted, 
the  presumption  is  that  the  crisis  of  1837-39  would 
have  been  obviated  or  materially  mitigated." 

GUARANTEED    FIRST    BY    LOCAL     CLEARING    HOUSE. 

Third.  The  payment  of  the  principal  and  inter- 
est of  the  certificates  is  also  guaranteed  to  the 
holder  by  all  the  banks  of  the  clearing  house  by 
vote  of  their  boards.  The  addition  of  this  in- 
dorsement gives  to  the  certificates  the  strength  of 
the  combined  capital  of  all  the  associated  banks 

1  See  his  argument  on  this  subject,  pages  502,  503  of  his  fifth 
edition  of  Adam  Smith's  Wealth  of  Nations. 


HIGHEST  CREDIT  111 

and  adds  to  the  collateral  a  fifth   name,  which  is 
stronger  than  all  the  other  four. 

GUARANTEED    BY    ALL    THE    CLEARING   HOUSES    OF 

THE    COUNTRY. 

Fourth.  The  extension  of  this  system  over  the 
whole  country  and  its  adaptation  to  the  issue  of 
currency  instead  of  certificates,  is  only  the  devel- 
opment of  a  plan  which  has  been  found  by  practi- 
cal experience  to  be  good.  The  whole  country 
would  be  divided  into  clearing  house  districts,  and 
all  banks  of  each  district  should  first  guarantee 
their  own  issues,  as  is  done  by  the  New  York  asso- 
ciated banks,  and  thereafter  the  issues  of  the  oth- 
ers. This  would  pledge  the  banking  capital  of  the 
country  for  the  redemption  of  the  currency  issued 
by  the  clearing  houses,  and  thus  place  the  respon- 
sibility therefor  where  it  belongs,  —  that  is,  on  the 
capital  which  is  benefited  by  the  issue,  and  on  the 
banks,  whose  business  it  is  to  supervise  the  granting 
of  credits.  The  addition  of  this  last  guarantee  adds 
a  sixth  name  to  the  security  of  the  paper  currency 
which  would  thus  be  issued,  and  as  it  is  stronger 
than  all  the  other  five,  it  raises  such  currency  to  a 
rank  of  credit  which  cannot  be  reached  by  any 
other  means  short  of  a  government  guarantee. 

MAINTAINED    AT    PAR  OVER    THE  WHOLE  COUNTRY. 

Fifth.  Notes  issued  by  one  clearing  house  would 
necessarily  be  accepted  as  good  in  payments  of 
debts  through  any  other,  and  thus  the  notes  would 
be  maintained  at  par  over  the  whole  country. 


172      FIXED  AND  REDEEMABLE   CURRENCY 
SUCH    ISSUES   SHOULD   BE   LIMITED. 

Such  a  system  should  include  the  placing  of  a 
specified  limit  to  the  issues  by  each  clearing  house 
in  accordance  with  the  capital  and  requirements  of 
the  banks  of  its  districts.  The  regulation  of  the 
form  of  the  currency  and  of  all  liabilities  in  con- 
nection therewith  should  be  governed  by  an  act  of 
Congress.  Within  the  limits  assigned  by  legisla- 
tion there  would  be  full  scope  for  the  exercise  of 
discretion  by  clearing  houses.  Experience  shows 
that  the  wants  of  the  business  community  are  bet- 
ter and  safer  guides  than  any  preconceived  ideas 
of  what  the  amount  of  issues  should  be.  Banks 
are  the  best  judges,  not  singly  but  collectively, 
and  their  tendency  is  always  to  restrict  credits  and 
impose  limits  not  only  on  themselves  but  on  their 
customers.  If  a  maximum  limit  of  issues  were 
fixed  by  law,  it  is  certain  that  the  actual  issues 
would  always  be  far  below  it. 

THKEE  ADVANTAGES  OF  A  CLEARING  HOUSE 

CURRENCY. 

The  advantages  of  a  redeemable  currency  are 
threefold. 

IT   IS   EXPANSIVE. 

First,  it  is  expansive.  This  point  has  been 
largely  covered  by  what  has  been  already  said,  and 
it  only  remains  to  notice  that  such  a  system  is  so 
adaptive  that  when  once  adjusted  it  would  respond 
to  the  annual  demands  for  currency  at  different 
seasons  in  different  parts  of  the  country,  noiselessly 


FIXED  CURRENCY  NEVER  RETIRED     173 

and  without  friction.  Movements  of  the  crops, 
which  now  take  place  with  much  difficulty,  would 
be  provided  for  without  disturbance.  The  natural 
operations  of  trade  and  business  would  be  encour- 
aged, assisted,  and  developed  by  the  most  potent 
agent  civilization  has  yet  devised,  which  is  a  well 
secured  bank  note  circulation. 

IT   IS   EETIRED   WHEN    DEMAND   CEASES. 

But,  secondly,  its  advantage  is  chiefly  in  the 
retirement  of  the  notes  when  their  work  is  done. 
Fixed  currency  is  never  retired  except  by  shipping 
it  out  of  the  country,  and  it  is  never  increased  to 
meet  a  sudden  demand  except  by  shipping  it  back. 
Both  of  these  operations  are  cumbersome  and  ex- 
pensive, and  no  more  intelligent  than  we  should 
expect  to  find  prevailing  among  the  tribes  of  Af- 
rica. To  attempt  to  supply  domestic  needs  by  im- 
portations of  gold,  and  to  dispose  of  our  surplus 
by  shipping  it,  is  a  crude  and  barbarous  device, 
that  may  be  likened  to  the  Chinese  method  of  burn- 
ing villages  to  secure  a  little  roast  pork,  that 
Charles  Lamb  tells  us  of.  Under  our  present  sys- 
tem, the  importations  and  exportations  of  gold, 
which  should  pass  unnoticed,  shake  business  to  its 
centre,  and  become  events  of  national  importance. 
A  redeemable  paper  currency  would  obviate  all 
this  by  supplying  our  domestic  wants  at  home. 

DANGERS    FROM    ACCUMULATIONS. 

If  the  amount  of  fixed  currency  is  maintained  at 
a  figure  large  enough  to  enable  it  to  perform  all 


^\ 

"ERf          )) 


174      FIXED  AND  REDEEMABLE   CURRENCY 

special  services  in  the  busy  season  of  the  year,  then 
in  the  dull  season,  usually  the  summer  months, 
it  would  accumulate  in  idleness  at  the  money  cen- 
tres. Watts's  couplet,  — 

"  Satan  finds  some  mischief  still 
For  idle  hands  to  do," 

is  especially  applicable  to  idle  currency.  Financial 
adventurers  are  waiting  for  a  plethora  of  money  to 
tempt  idle  funds  with  specious  schemes.  But  an 
expansive  currency  is  not  exposed  to  this  danger. 
When  money  is  wanted  under  such  a  system,  there 
is  no  lack  of  it ;  when  it  is  not  wanted,  it  is  retired 
and  there  is  no  slack.  It  is  the  slack  which  is  the 
bane  of  banking.  No  lack,  no  slack,  is  the  best 
description  of  a  redeemable  paper  currency. 

IT   WOULD    PREVENT   PANICS. 

The  third  benefit  of  a  redeemable  paper  cur- 
rency is  that  it  would  be  a  preventive  of  money 
panics,  and  the  consequent  evils  of  forced  liquida- 
tions at  frequent  intervals.  A  forced  liquidation 
is  incident  to  any  system  that  does  not  admit  of 
expansion  in  case  of  need,  just  as  steam  boilers  are 
liable  to  explode  if  they  have  no  safety-valves.  If 
all  the  currency  of  a  country  is  fixed,  that  is,  metal 
or  representative  of  metal,  no  matter  how  much 
there  is  of  it,  even  if  the  amount  is  greater  than 
the  dream  of  the  most  ardent  silver  advocate,  and 
if  the  banks  are  conducted  on  the  principle  of  a 
reserve  of  a  certain  percentage,  a  crisis  of  want  of 
confidence  is  liable  to  happen  at  any  time  when  a 
serious  calamity  occurs  or  threatens  to  occur.  This 


WHO  RUNS   THE   QUICKEST  175 

want  of  confidence  shows  itself  in  a  demand  from 
creditors  for  currency  to  the  extent  of  their  credit 
balances,  which  soon  depletes  the  banks  of  their 
reserves.  A  bank  cannot  refuse  to  meet  this  de- 
mand and  maintain  its  solvency,  for  the  creditors 
own  the  cash  in  the  bank.  They  understand  what 
a  reserve  means,  and  that  the  man  who  runs  the 
quickest  is  the  surest  to  get  his  money.  On  an 
even  distribution  every  creditor  would  receive  10 
per  cent,  of  his  credit  balance  in  cash,  but  he  wants 
it  all  in  cash.  Hinc  illce  lachrymoe  !  By  a  long 
series  of  similar  experiences  the  whole  army  of 
creditors  is  trained  to  run,  and  they  put  their  ac- 
quirement into  exercise  on  every  reasonable  or  un- 
reasonable provocation  with  a  unanimity,  precision, 
and  effectiveness  which  are  worthy  of  a  better 
cause.  The  means  of  self-protection  which  the 
banks  have  is  the  collection  of  loans,  bills  receiv- 
able, and  other  debts.  As  a  run  comes  suddenly 
the  banks  must  collect  suddenly,  and  debtors  are 
expected  to  pay  promptly.  All  debtors  must  there- 
fore put  their  property  up  for  sale  on  a  market 
bare  of  cash,  sell  it  at  whatever  sacrifice,  and  liqui- 
date their  loans.  As  a  consequence  prices  decline 
heavily,  many  failures  occur,  and  general  distress 
follows.  If  the  currency  of  an  isolated  country 
like  ours  is  fixed  and  admits  of  no  expansion,  and 
banks  keep  only  a  reserve,  these  seasons  of  forced 
liquidation  must  come  whenever  a  financial  calam- 
ity overshadows  the  land.  If  they  come  every 
few  years  it  is  evident  that  the  losses  consequent 
on  the  sales  at  the  great  declines  and  the  small 


176  FIXED  AND  REDEEMABLE  CURRENCY 

returns  during  the  following  depressions  would  de- 
stroy the  profits  of  business,  weaken  the  financial 
position  of  the  country,  and  largely  increase  the 
chances  of  subsequent  failures. 

PREVENTION   OF   PANICS   OF   THE   UTMOST    CONSE- 
QUENCE. 

It  is  therefore  of  the  utmost  importance  to  the 
solvency  and  welfare  of  the  community  that  the 
banking  system  should  confer  on  the  banks  the 
power  to  meet  these  occasions  of  lack  of  confi- 
dence and  carry  the  business  interests  of  the  nation 
over  without  disaster.  One  of  the  objects  of  the 
currency  system  should  be  to  reduce  preventable 
failures  to  a  minimum  and  to  grant  all  needed  fa- 
cilities to  legitimate  business.  Twelve  thousand 
failures  are  too  many  to  occur  in  one  year  in  our 
country,  and  from  three  to  five  years  is  too  short 
an  interval  between  money  panics. 

These  ends  can  only  be  accomplished  by  giving 
to  banks  the  power  to  issue  bank  notes  to  the  busi- 
ness community  according  to  its  needs,  on  con- 
vertible collateral,  whenever  a  crisis  or  a  legitimate 
demand  occurs. 

BULLION    COMMITTEE    OF    1810. 

The  report  of  the  Bullion  Committee  of  1810  of 
the  English  House  of  Commons  laid  down  the 
principle  that  "  an  enlarged  accommodation  is  the 
true  remedy  for  that  occasional  failure  of  confi- 
dence to  which  a  system  of  paper  credit  is  un- 
avoidably exposed."  The  truth  of  this  principle 


REMEDY  FOR  FAILURE  OF  CONFIDENCE   177 

has  been  confirmed  by  every  money  panic  in  the 
eighty-three  years  which  have  followed  its  enunci- 
ation. 

From  the  above  discussion  it  is  concluded  that 
our  country  needs,  first,  a  fixed  circulation  of  gold 
and  silver  sufficient  for  the  ordinary  payments  of 
its  domestic  and  foreign  exchanges,  and  second,  a 
redeemable  paper  currency  which  may  expand  and 
contract  with  the  demands  of  trade. 


XIII 

THE    PHILOSOPHY  OF    THE    HISTORY  OF  BANK 
CURRENCY  IN  THE  UNITED  STATES1 

BANKING    OF   THREE   KINDS. 

BANKING  is  of  three  kinds  ;  or,  it  may  be  said, 
banking  has  passed  through  three  stages  of  devel- 
opment. In  the  first  it  is  a  common-law  right,  in 
the  second  a  charter  privilege,  and  in  the  third  a 
right  free  to  all  under  general  banking  laws.  Each 
kind,  or  stage,  has  its  controlling  characteristic. 
In  the  first,  the  rights  of  the  individual,  in  the 
second,  the  rights  of  the  governing  power,  and  in 
the  third,  the  rights  of  the  people,  are  respectively 
paramount. 

The  second  stage  includes  all  there  is  in  the  first, 
with  the  supremacy  of  the  State  added  ;  the  third, 
all  in  the  first  and  the  second,  with  the  supremacy 
of  the  people  added. 

Though  in  its  early  history  there  was  no  clear 
definition  of  what  the  term  banking  meant,  it  is 
evident,  from  legal  decisions  and  commercial 
usages,  as  quoted  by  MacLeod  in  his  "  Theory  of 
Credit,"  that  its  original  and  fundamental  idea  was 
the  right  and  power  to  issue  notes  to  circulate  as 
money. 

1   Reprinted  from  the  Banker*'  Magazine,  February.  1895. 


INDIVIDUAL  NOTES  179 

t 

COMMON-LAW    EIGHT    TO    ISSUE    CURRENCY   WITH- 
DRAWN. 

Under  the  well-founded  plea  of  public  policy  and 
necessity,  in  the  United  States  and  in  most  civilized 
countries,  the  common-law  right  to  issue  currency 
has  been  taken  away  from  individuals  and  unau- 
thorized corporations,  and  has  been  left  as  the  pre- 
rogative only  of  specially  chartered  banks  and 
banks  organized  under  general  laws.  The  common- 
law  right  to  engage  in  banking  has,  therefore,  been 
limited  to  ordinary  commercial  transactions. 

The  necessity  for  the  restriction  of  the  common- 
law  right,  as  it  was  exercised  in  England  in  1825, 
and  before  that  time,  is  shown  by  the  following 
extract  from  a  speech  delivered  by  Lord  Liverpool 
on  the  17th  of  February  of  that  year.  He  said : 
"  The  present  system  of  law  as  to  banks  must  now 
be  altered  in  one  way  or  another.  It  is  the  most 
absurd.  By  it  a  cobbler  or  a  cheesemonger,  without 
any  proof  of  his  ability  to  meet  them,  might  issue 
his  notes  unrestricted  by  any  check  whatever." 

In  the  United  .States  the  same  condition  of  affairs 
existed,  as  is  shown  by  the  following  extract  from 
the  report  of  the  Committee  on  Banks  made  to  the 
Senate  of  the  State  of  New  York,  February  25, 
1837.  The  report  says  :  — 

"  The  issuing  of  individual  notes  for  circulation 
was  the  great  practical  evil  which  called  into  ex- 
istence the  restraining  law  (of  1818).  The  State 
had  become  literally  covered  with  the  notes  of 
Barker's  Exchange  Bank,  the  Utica  Insurance 


180      HISTORY  OF  CURRENCY  IN  THE   U.  S. 

f 

Company,  the  Little  Falls  Aqueduct  Association, 
and  the  small  notes  of  Benjamin  Rathbone,  Calvin 
Cheeseman,  and  a  host  of  unremembered  individ- 
uals and  corporations,  tavern-keepers,  glass-makers, 
merchants,  turnpike  companies,  etc." 

Governor  Marcy,  in  his  annual  message,  January 
3,  1837,  said:  — 

"  The  privilege  of  issuing  a  paper  circulating 
medium  cannot  be  given  to  all  individuals  and  as- 
sociations that  desire  to  have  it,  without  exposing 
the  public  to  evils  against  which  it  is  the  duty  of 
the  legislature  to  afford  ample  and  certain  pro- 
tection." 

From  the  reports  of  the  United  States  Currency 
Commission,  it  would  appear  that  Belgium  forms 
perhaps  the  only  exception  in  this  particular,  and 
that  in  that  country,  even  at  the  present  time,  the 
right  to  issue  currency  is  not  restricted,  but  may 
be  enjoyed  by  individuals  as  well  as  by  chartered 
institutions. 

SPECIALLY   CHARTERED    BANKS. 

Though  the  common-law  right  to  issue  currency 
no  longer  exists  in  this  country,  its  exercise  was 
a  necessary  precursor  of  legalized  and  restricted 
banking,  and  in  discussing  that  subject  there  re- 
main but  the  two  divisions  under  which  it  may  be 
classified  :  First,  specially  chartered  banks ;  second, 
banks  organized  under  free,  or  general,  laws. 

In  considering  the  distinctions  between  these  two 
classes  of  banks  some  of  the  fundamental  questions 
of  banking  will  be  discussed,  and  their  connection 


ONE  BANK  FOR   ONE  NATION          181 

with  the  currency  questions  now  before  the  public 
will  be  perceived. 

This  country  inherited  from  England  language, 
religion,  social  and  business  habits,  and  the  com- 
mon law,  but  only  so  much  of  the  latter  as  was  not 
in  conflict  with  the  fundamental  principles  of  the 
Declaration  of  Independence. 

After  the  Revolution  there  was  a  continuous  ad- 
justment of  the  inherited  legislative  methods  and 
practices  to  bring  them  into  accord  with  true  re- 
publican ideas. 

Our  only  financial  model  worthy  of  imitation 
was  the  charter  of  the  Bank  of  England,  and  the 
first  banks  of  the  United  States  were  organized, 
like  that  bank,  under  special  charters,  and  were 
intended  to  be  monopolies. 

The  opinion  then  prevailed  in  the  commercial 
world  on  the  other  side  of  the  Atlantic  that  one 
bank  was  sufficient  for  one  nation.  There  were 
the  Banks  of  Venice,  Amsterdam,  of  France,  Eng- 
land, Ireland,  Scotland,  and  it  was  concluded  here 
that  there  should  be  one  Bank  of  North  America, 
which  was  chartered  in  1781,  with  authority  to 
open  offices  in  various  cities  at  will. 

But  when  the  independence  and  sovereignty  of 
the  States  was  established,  then  the  plan  of  char- 
tering a  bank  for  each  one  of  the  States  met 
approval,  and  the  Massachusetts  Bank,  the  Bank 
of  New  York,  and  a  bank  for  Maryland  were  char- 
tered by  the  legislatures  of  those  several  States. 

Soon  afterward  Congress  gave  a  charter  to  the 
first  Bank  of  the  United  States,  with  the  inten- 


182     HISTORY   OF  CURRENCY  IN   THE   U.  S. 

tion  of  granting  to  it  special  privileges  and  mono- 
polies. 

The  granting  of  bank  charters  speedily  became 
a  great  source  of  dishonest  revenue  to  members  of 
the  various  state  legislatures,  and,  as  the  result 
of  disgraceful  corruption,  a  whole  brood  of  state 
banks  obtained  charters  and  were  organized. 

Albert  Gallatin  wrote  in  1831  :  "  With  the  ex- 
ception of  Mr.  Girard's  bank,  all  the  banks  estab- 
lished in  the  United  States  are  joint  stock  com- 
panies, incorporated  by  law,  with  a  fixed  capital, 
to  the  extent  of  which  only  the  stockholders  are 
generally  responsible." 

But  the  lack  of  harmony  between  specially  char- 
tered banks  and  the  principle  of  representative 
government  soon  made  itself  felt.  The  contest 
against  banking  monopoly  was  first  waged  over  the 
United  States  Bank  as  its  most  conspicuous  ex- 
ample. 

Few  contests,  short  of  war,  were  of  greater  viru- 
lence or  had  a  greater  moulding  influence  on  the 
development  of  republican  thought  than  that  which 
resulted  in  the  overthrow  of  the  United  States 
Bank.  General  Jackson  wrote  that  that  event  was 
necessary  "  to  preserve  the  morals  of  the  people, 
the  freedom  of  the  press,  and  the  purity  of  the 
elective  franchise."  This  fairly  expresses  the  sen- 
timent of  the  country,  which  resulted  in  the  refusal 
to  renew  the  second  bank's  charter. 


FREE  BANKING  183 

BANKING   UNDER    GENERAL    LAWS. 

The  contest  did  not  cease  witli  that  victory,  nor 
did  the  opposition  to  bank  monopolies  fully  tri- 
umph until  the  principle  of  free  banking  was  estab- 
lished among  the  States. 

Petitions  for  a  free  banking  law  began  pouring 
into  the  legislature  of  New  York  during  the  ses- 
sion of  1837  and  1838.  One  of  the  memorials  may 
be  quoted  as  an  example.  It  reads  :  "  Special  and 
exclusive  powers  are  contrary  to  and  inconsistent 
with  the  genius  and  principles  of  our  republican 
institutions.  Restraints  should  be  general  in  their 
application,  so  that  all  may  participate  in  the  busi- 
ness of  banking  on  ecfual  terms."  And  the  Secre- 
tary of  the  Treasury,  in  his  annual  report  in  the 
year  1838,  said  :  "  The  whole  monopolies  of  bank- 
ing might,  with  public  advantage,  be  entirely  abol- 
ished, and  this  banking  privilege,  under  proper 
general  restraints,  securities,  limitations,  and  re- 
quirements, may  be  safely  thrown  open  to  all." 

In  obedience  to  the  popular  wish,  the  free  bank- 
ing law  of  New  York  was  passed  April  18,  1838, 
and  thereby  the  common-law  right  to  issue  currency 
was  restored  to  the  people  under  suitable  general 
restrictions. 

So  it  came  to  pass  that  the  system  of  banking 
in  the  United  States,  which  began  on  the  model  of 
the  historic  governmental  banks  of  Europe,  with 
special  privileges  and  monopolies,  was  forced  by 
the  genius  of  American  institutions,  as  evidenced 
by  the  act  of  the  general  government,  and  by  the 


184     HISTORY  OF  CURRENCY  IN   THE   U.  S. 

act  of  its  chief  commercial  State,  to  be  free  and  in- 
dependent. 

BANKING   UNDER    REPUBLICAN   PRINCIPLES. 

The  history  of  banking  in  the  United  States,  in 
accordance  with  republican  principles,  may  be  justly 
considered  to  commence  with  the  destruction  of  the 
United  States  Bank  by  General  Jackson  and  with 
the  adoption  by  New  York  of  the  principle  of  free 
banking.  James  De  Peyster  Ogden  wrote  in  1840  : 
"  The  former  commercial  representative  in  Con- 
gress from  this  city  (New  York)  considered  our 
free  banking  law  as  equal  to  a  second  Declaration 
of  Independence." 

This  was  the  beginning  of  a  change  in  the  bank- 
ing system  of  the  United  States,  which  became  uni- 
versal by  the  passage,  twenty-five  years  later,  of 
the  National  Banking  Act. 

STATE   BANKING    SYSTEMS   IN    1863. 

To  avail  ourselves  of  the  wisdom  and  experience 
which  was  acquired  by  the  country,  and  to  learn 
what  progress  was  made  among  the  various  States 
toward  the  adoption  of  general  banking  laws  dur- 
ing the  twenty-five  years  from  1888  to  1863,  it  is 
necessary  to  investigate  the  condition  of  state 
banking  laws  at  the  close  of  that  quarter  century, 
when  in  1863  Congress  took  the  subject  of  banking 
out  of  the  hands  of  the  state  legislatures,  largely 
as  regards  general  banking  and  totally  as  regards 
the  currency. 

The  development  of  state  systems  was  arrested 


STATE  SYSTEMS  185 

by  the  national  system,  which  was  founded  upon 
them.  To  understand  the  national  system  a  know- 
ledge of  the  state  systems  is  necessary. 

As  our  inquiry  relates  to  state  laws  prior  to 
1863,  we  must  exclude  from  our  investigations  the 
States  which  have  been  formed  and  have  come  into 
being  since  the  establishment  of  the  national  bank- 
ing system.  As  Congress  had  taxed  state-bank 
currency  out  of  existence,  no  provision  for  it  and 
little  attention  to  the  subject  of  banking  could  be 
expected  from  that  body. 

The  younger  members  of  the  family  of  States 
who  have  come  to  maturity  too  lately  to  participate 
in  the  currency  discussions  of  from  thirty  to  sixty 
years  ago  are :  Colorado,  Idaho,  Nebraska,  North 
Dakota,  Montana,  South  Dakota,  Utah,  Washing- 
ton, West  Virginia,  and  Wyoming,  ten  in  all. 

In  the  remaining  States,  an  examination  shows 
that  in  1863  banking  systems,  carefully  elaborated 
and  operating  largely  to  the  satisfaction  of  the  peo- 
ple, were  in  operation,  with  four  exceptions,  the 
States  of  California,  Oregon,  Texas,  and  Nevada. 
In  these  four  States,  the  remnant  of  a  larger  num- 
ber which  originally  had  the  same  provisions,  bank- 
ing and  issues  of  circulating  notes  were  forbidden. 
This  was  due,  no  doubt,  to  distrust  of  local  banks, 
a  preference  for  gold,  the  distance  of  these  States 
from  commercial  centres,  and,  in  the  case  of  Ne- 
vada, perhaps,  to  a  desire  to  relegate  the  control 
of  banking  entirely  to  the  national  government. 

By  separating  the  ten  new  States  and  the  four 
States  which  have  set  themselves  against  banking 


186     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

and  bank  circulations,  we  have  remaining  the 
States  whose  legislatures  had  been  compelled  to 
discuss  banking  methods  and  the  issue  of  a  circu- 
lating medium  as  a  practical  question,  and  to  pass 
laws  regulating  the  subject. 

STATES    GRANTING    SPECIAL    CHARTERS. 

From  these  remaining  States  we  may  learn  much 
regarding  the  condition  and  growth  of  American 
banking.  They  may  be  classified  on  two  lines  : 
First,  the  States  which,  before  1863,  had  not  gone 
beyond  the  second  stage  of  the  development  of 
banking,  in  which  it  is  held  to  be  a  privilege  to  be 
enjoyed  under  a  special  charter,  to  be  granted  by 
special  legislative  act.  Second,  the  States  which, 
before  1863,  had  reached  the  third  stage  of  devel- 
opment, in  which  banking  is  held  to  be  "  a  privilege 
which,  under  proper  restraints,  securities,  limita- 
tions, and  requirements,  may  be  safely  thrown  open 
to  all." 

The  States  of  the  first  class  were  :  Alabama, 
Arkansas,  Delaware,  Florida,  Kentucky,  Maine, 
Maryland,  Mississippi,  Missouri,  New  Hampshire, 
North  Carolina,  Rhode  Island,  South  Carolina, 
Tennessee,  and  Virginia,  fifteen  States  in  all. 

Several  of  these  States  have  adopted  new  consti- 
tutions and  general  laws  since  1863,  but  from  the 
banking  sections  reference  to  a  currency  is  gener- 
ally omitted. 


VARIOUS  SYSTEMS  187 

STATES   WITH    GENERAL    BANKING    LAWS. 

The  States  which  have  adopted  free  or  general 
banking  laws,  either  exclusively  by  a  constitutional 
provision,  or  coordinately  with  chartered  banks  or 
a  system  of  state  banks  with  branches,  by  legis- 
lative enactment,  are  as  follows,  the  dates  being  of 
the  adoption  of  a  constitutional  provision  or  of  the 
enactment  of  a  general  law :  New  York,  April  18, 
1838;  Georgia,  December  26,  1838  ;  Ohio,  1845; 
Michigan,  1850  ;  New  Jersey,  1850 ;  Indiana,  1851 ; 
Vermont,  1851 ;  Massachusetts,  1851  ;  Connecti- 
cut, 1852  ;  Louisiana,  1855  ;  Wisconsin,  1855  ; 
Iowa,  1857 ;  Minnesota,  1857-58 ;  Kansas,  1859  ; 
Pennsylvania,  1861 ;  Illinois,  1870,  —  in  all,  six- 
teen States. 

In  some  of  these  States  the  two  systems  existed 
side  by  side,  and  the  laws  remained  on  the  statute- 
books  under  which  special  charters  were  granted. 
This  gave  banking  capital  a  choice  under  which 
system  to  organize,  and  the  choice  was  made  of  the 
system  which  gave  the  greatest  freedom,  or  from 
which  the  greatest  profit  could  be  derived.  The 
movement  for  general  banking  was  not  strong 
enough  in  all  these  States  to  make  it  exclusive,  but 
whenever  a  general  law  was  passed  it  was  an 
approval  of  the  principle  involved  and  a  recogni- 
tion that  this  was  the  coming  system. 

STATE    BANKS  WITH    BRANCHES. 

In  other  of  these  States,  Ohio,  Indiana,  and 
Iowa,  good  systems  of  state  banks,  with  branches, 


188     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

were  organized,  under  general  laws,  with  the  prin- 
ciple of  mutual  responsibility  for  circulation,  in  the 
place  of  the  security  required  by  the  free  banking 
law.  These  state  banks  were  deservedly  popular 
and  successful,  and  form  the  best  models  we  have 
in  this  country  for  banks  of  their  class.  The  de- 
tails of  their  organization  will  be  referred  to  here- 
after. 

SPECIAL    CHARTERS    AND    GENERAL   LAWS    COM- 
PARED. 

We  have  now  divided  the  remaining  States  into 
two  classes,  from  which  we  may  clearly  see  the 
position  of  public  opinion  in  the  legislatures  and 
among  the  people,  from  Kansas  eastward,  in  1863, 
on  the  question  of  the  organization  of  banks  by 
special  charters  or  under  free  or  general  banking 
laws.  On  the  one  hand  we  have  the  exclusively 
charter  States,  which  represent  the  conservative 
element,  unchanged  since  colonial  times,  and  on 
the  other  the  progressive  element,  which,  under  the 
impetus  of  General  Jackson's  victory  over  the 
United  States  Bank,  had  carried  into  execution 
the  proposition  for  free  banking  laws. 

This  classification  is  not  fanciful  or  merely  ver- 
bal, and  the  processes  are  not  like  two  roads  which 
converge  at  a  common  point,  so  that  it  is  immate- 
rial which  road  one  journeys  over,  since  a  bank  is 
the  result. 

The  two  systems  are  diametrically  opposed  to 
each  other. 

Free  banking  under  general  laws  is  a  necessary 


A  NECESSARY  OUTGROWTH  189 

outgrowth  of  a  republican  form  of  government,  and 
is  in  harmony  with  its  institutions,  and  is  compar- 
atively, if  not  entirely,  unknown  outside  of  the 
United  States.  The  short  experience  in  1850  of 
Canada  with  a  law  framed  after  that  of  New  York 
shows  that  free  banking  is  a  plant  which  does  not 
grow  on  monarchical  soil,  even  though  the  govern- 
ment is  of  the  most  modern  and  enlightened  type. 

Banking  under  special  charters  is  based  on  the 
monarchical  principle  of  the  predominant  position 
of  the  government  and  the  granting  of  favors  to 
favorites,  and  is  the  rule  among  foreign  nations. 

The  people  of  the  States  whose  laws  provide  for 
granting  only  special  charters  to  banks  had  never 
been  completely  disenthralled  from  colonial  and 
aristocratic  sentiments,  manner  of  life,  and  modes 
of  legal  procedure.  Their  history  and  unchanged 
traditions  had  perpetuated  among  them  a  liking 
for  special  legislative  privileges  and  special  char- 
ters. This  tendency  runs  through  all  their  politi- 
cal principles,  and  it  asserted  itself,  as  a  matter  of 
course,  in  the  system  of  banking  they  preferred. 

DEVELOPMENT    OF    BANKING   UNDER   GENERAL 

LAWS. 

It  is  interesting  to  note  the  progress  of  the  idea 
of  banking  under  general  laws.  During  twelve 
years  but  two  States  followed  the  lead  of  New 
York.  In  spite  of  the  failure  of  many  of  her 
banks  in  that  time,  and  in  spite  of  the  shrinkage  in 
value  of  the  bonds  lodged  as  security  for  currency, 
the  States  recognized  that  a  secured  currency  was 


190     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

the  only  safe  principle  for  a  general  law  which  was 
to  provide  for  banks  in  large  and  small  cities  alike. 
The  chronological  order  of  the  adoption  of  the 
principle  by  the  sixteen  States  shows  a  natural  and 
healthy  spread  of  a  system  which,  as  it  was  tried 
and  understood  year  after  year,  obtained  increas- 
ing favor.  It  would  indicate  that  if  the  National 

o 

Banking  Law  had  not  been  established  in  1863  the 
country  might  have  had,  in  process  of  time,  excel- 
lent state  banking  systems  under  general  laws 
universally  adopted. 

DEVELOPMENT  OF  THE  TWO  SYSTEMS. 

The  record  shows  us  that,  previous  to  the  enact- 
ment of  the  national  law,  the  busy  commercial 
North  readily  adopted  general  banking  laws  with 
their  restrictions  and  guarantees,  while  the  pastoral 
South,  with  its  traditions,  naturally  preferred  to 
keep  unchanged  its  system  of  special  privileges 
granted  by  the  State  to  the  favored  few. 

The  two  systems  spread  in  the  line  of  the  devel- 
opment of  their  adjacent  territory,  separated  by 
the  physical  boundaries  of  the  Alleghanies.  New 
York  and  Ohio  gave  the  keynote  to  the  North,  and 
Maryland  and  Virginia  to  the  South.  They  occu- 
pied all  the  available  territory,  and  then  it  hap- 
pened that,  during  the  war,  owing  to  the  exigencies 
of  the  government,  both  were  superseded  by  a 
new  system,  the  National  Banking  Act,  which  is  a 
general  law,  and  thereby  general  banking  became 
the  law  of  the  land. 


A   CONTRADICTION  IN  TERMS         191 
CHARACTERISTICS    OF   CHARTERED    BANKS. 

Besides  the  relation  of  special  and  general  bank- 
ing laws  to  republican  institutions,  there  are  other 
points  in  which  they  are  diametrically  opposed. 

It  seems  to  follow  universally  that  when  banks 
are  specially  chartered,  special  acquaintance  with 
the  incorporators  and  special  confidence  in  their 
management  is  inferred,  and  these  special  circum- 
stances make  it  seem  unnecessary  to  require  more 
than  formal  guarantees  for  the  protection  of  de- 
positors or  note-holders.  To  grant  a  special  privi- 
lege to  a  set  of  individuals  for  their  own  benefit, 
and  then  to  demand  guarantees  that  these  privileges 
will  be  used  for  the  benefit  of  others,  is  a  contradic- 
tion in  terms.  This  characteristic  is  to  be  noticed 
in  all  special  banking  legislation.  This  special 
connection  binds  the  government  to  the  bank,  and 
makes  it  in  a  measure  responsible  for  its  good  con- 
duct. Consequently,  small  individual  chartered 
banks  in  the  smaller  towns  are  an  anomaly.  Char- 
tered banks  should  be  so  large  in  capital  and  busi- 
ness as  to  have  a  commanding  credit  far  and  wide 
outside  of  the  State  granting  the  charter. 

But  with  general  banking  laws  this  is  not  so. 
These  laws  were  first  called  "  free,"  but  that  word 
has  since  been  changed  to  "  general,"  because  the 
provisions  of  the  laws  were  so  carefully  and  mi- 
nutely drawn  that  the  word  "  free  ' '  seemed  a  mis- 
nomer. General  banking  laws  require  publicity, 
impose  restrictions,  and  demand  guarantees  in  the 
same  measure  that  special  charters  omit  these 
requirements. 


192     HISTORY  OF  CURRENCY  IN   THE   U.  S. 
SECURED    AND    UNSECURED    CURRENCY. 

In  no  particular  is  the  difference  between  banks 
organized  under  special  and  general  laws  more 
clearly  and  characteristically  seen  than  in  the 
modes  of  issuing  currency.  In  the  laws  of  all  the 
States  I  have  found  no  instance  in  which  a  specially 
chartered  bank,  or  a  state  bank  with  branches,  is 
required  to  make  a  deposit  of  United  States  or 
state  bonds,  or  give  other  security  equal  in  amount 
to  the  notes  issued.  Nor  have  I  found  a  general 
law  of  any  State  which  does  not  require  a  deposit 
with  a  state  officer  of  collateral  security  at  least  to 
the  full  amount  of  the  notes  issued. 

GENERAL   LAWS    REQUIRE    A    SECURED    CURRENCY. 

This  makes  the  broadest  possible  distinction  be- 
tween the  banks  of  these  two  classes.  A  general  law 
makes  the  provision,  so  simple  of  comprehension 
as  to  form  the  best  basis  for  confidence  and  credit, 
that  a  deposit  of  bonds  shall  be  made  with  a  duly 
appointed  state  officer,  equal  in  value  and  amount 
to  the  currency  to  be  issued. 

SPECIAL   CHARTERS    FAVOR   AN   UNSECURED    CUR- 
RENCY. 

Special  charters  provide  a  number  of  ways  by 
which  this  lack  of  security  is  made  up.  Some  of 
these  methods  are  weak  and  defective,  and  others, 
in  a  rising  grade,  approach  nearly  to  a  perfect 
security.  They  are  in  part :  First,  limiting  the 
amount  of  the  notes  to  be  issued  to  a  percentage  of 


MODES   OF  SECURITY  193 

the  capital  of  the  bank.  Second,  giving  an  officer 
of  the  State  power  to  order  an  examination  of  the 
bank's  affairs,  which  is  extremely  pastoral.  Third, 
requiring  reports  to  be  rendered  annually,  semi- 
annually,  or  quarterly.  Fourth,  requiring  a  de- 
posit with  a  central  bank  of  redemption,  called  the 
Suffolk  banking  system.  Fifth,  requiring  a  safety 
fund  of  a  few  per  cent,  to  be  deposited  with  the 
State.  Sixth,  forbidding  the  bank  to  increase  its 
loans  while  the  amount  in  the  safety  fund  is  below 
the  required  percentage.  Seventh,  requiring  the 
bank  to  keep  on  hand  in  gold  and  silver  coin  12|, 
25,  or  30  per  cent,  of  its  outstanding  notes. 
Eighth,  requiring  the  State,  and  all  counties  in  the 
State,  to  receive  the  notes  in  payment  of  taxes. 
Ninth,  requiring  the  several  branches  of  a  state 
bank  to  receive  each  other's  notes  at  par  for  all 
debts  due  each.  Tenth,  making  the  various 
branches  mutually  responsible  for  each  other's 
notes,  and,  in  case  of  failure,  the  solvent  banks  to 
pay  contributions  pro  rata  to  redeem  them  in  cash. 
Eleventh,  giving  the  note-holders  a  preference  over 
all  the  other  creditors  of  a  bank,  and,  in  case  of 
failure,  all  the  assets  of  the  bank  to  be  turned  over 
to  a  state  officer  for  that  purpose.  Twelfth,  for- 
bidding the  banks  ever  to  suspend  payment  in  gold 
on  their  notes.  Thirteenth,  that  each  and  every 
bank  shall  mutually  be  responsible  for  all  the  debts, 
notes,  and  engagements  of  each  other. 

These  provisions  are  to  be  found  scattered  among 
state  laws  in  force  in  1863,  under  which  special 
charters  were  granted,  or  state  banks  with  branches 


194     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

were  organized.  The  most  stringent  laws  have 
been  found  to  work  well  and  to  be  accompanied  by 
the  fewest  failures. 

CAN   AN   UNSECURED   CURRENCY   BE   MADE   GOOD. 

If  it  were  desired  to  construct  a  good  system  of 
banking  out  of  these  provisions,  with  an  unsecured 
currency,  it  could  be  made  by  including  device 
numbered  seventh,  that  each  bank  shall  keep  30 
per  cent,  of  its  outstanding  notes  in  gold  in  its 
vaults  at  all  times ;  ninth,  the  provision  found  in 
the  laws  of  Kentucky  and  other  States,  that  the 
notes  of  the  "  mother  bank '  and  of  each  branch 
shall  be  current  in  every  other  ;  tenth,  the  provision 
found  in  the  laws  of  Iowa  and  other  States,  that 
solvent  branches  of  the  state  bank  must  contribute 
pro  rata  to  the  fund  for  the  redemption  of  the 
notes  of  failed  banks  ;  eleventh,  giving  note-holders 
a  preference  over  other  creditors  of  a  bank ;  and, 
thirteenth,  the  Indiana  provision,  which,  as  stated 
in  the  law,  reads  that  "  each  and  every  branch  of 
the  Bank  of  the  State  of  Indiana  shall  mutually  be 
responsible  for  all  the  debts,  notes,  and  engage- 
ments of  each  other." 

It  cannot  be  said  that  such  a  system  is  impossi- 
ble or  impracticable,  for  state  banks  with  branches 
were  organized  and  flourished  under  these  regula- 
tions ;  for  instance,  in  Ohio,  Indiana,  Iowa,  Mis- 
souri, and  Kentucky,  before  the  National  Banking 
Law  went  into  operation. 


FELLOWSHIP  IN  BUSINESS  195 

HOYT   SHERMAN   ON   IOWA    STATE   BANK. 

Concerning  the  Iowa  State  Bank,  Hoyt  Sherman, 
a  veteran  banker,  and  brother  of  the  General  and 
of  Senator  Sherman,  said  before  the  Iowa  State 
Bankers'  Association  in  1894  :  "  From  the  start 
these  branches  secured  the  complete  confidence  of 
the  communities  where  located,  and  their  circula- 
tion was  welcomed  and  sought  after  by  all  classes 
as  an  equivalent  to  gold.  During  the  course  of 
their  business  history  a  few  of  the  branches  at 
different  times  made  mistakes  in  their  investments, 
or  temporarily  mismanaged  funds  in  their  hands. 
These  events  worked  no  injury  to  their  customers 
or  the  public,  and  in  fact  were  not  known  outside 
of  bank  circles  until  long  after  they  were  passed 
and  the  dangers  overcome.  The  cool,  dispassioned, 
unprejudiced  judgment  of  the  other  branches  en- 
ables them  to  see  the  danger  at  once,  and  apply  the 
remedy  in  time  to  protect  their  crippled  brother,  as 
well  as  to  avoid  on  their  part  a  contingent  liability. 
They  became  a  strong  illustration  of  the  principle 
of  fellowship  in  business,  underlying  the  state 
bank  system." 

Many  would  prefer  a  system  of  secured  currency, 
without  mutual  responsibility  and  other  safeguards, 
to  an  unsecured  currency  with  their  safeguards. 
But  to  give  the  country  an  unsecured  currency, 
without  the  strongest  guarantees,  is  to  take  a  step 
backward  and  to  unite  the  weakest  halves  of  the 
special  charter  and  general  law  system  ;  and  the 
result  would  be  one  too  weak  to  hold  together. 


196     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

No  currency  not  secured  by  deposit  of  ample  col- 
laterals should  be  proposed  or  adopted  unless  it  is 
surrounded  by  the  safeguards  which  experience  has 
shown  to  be  effective. 

CLEARING    HOUSE   CERTIFICATES. 

In  1857,  1860,  and  1861,  and  at  various  times 
since  the  establishment  of  the  national  banking 
system,  and  perhaps  in  large  measure  necessitated 
by  the  inelasticity  both  of  the  state  and  national 
systems,  the  country  has  become  acquainted  with 
"  a  currency  between  banks ' '  in  the  form  of  clear- 
ing house  certificates.  These  show  to  us  the  fea- 
tures of  a  currency  which  the  most  conservative  of 
our  banks,  at  the  present  time,  consider  the  best 
for  themselves. 

PROVISIONS   FOR   THEIR   SECURITY. 

These  features  are,  first,  that  the  clearing  house 
currency  is  secured  by  pledge  of  commercial  assets 
in  the  hands  of  a  committee  acting  as  trustee  for 
the  note-holders. 

This  provision  is  derived  from  the  New  York 
state  law. 

Second,  the  associated  banks  agree  to  take  the 
notes  in  settlement  of  all  claims  against  any  of 
their  number.  This  is  similar  to  the  provisions  of 
the  law  of  Kentucky  and  other  States. 

Third,  if  any  loss  occurs  from  the  insufficiency 
of  the  collateral,  or  the  insolvency  of  the  banks  to 
whom  the  certificates  are  issued,  it  is  to  be  appor- 
tioned pro  rata  among  the  associated  banks.  This 


A    COMPLETE  SYSTEM  197 

is  in  accordance  with  the  laws  of  Iowa  and  other 
States. 

Fourth,  the  banks  thereby  agree  to  stand  by  each 
other  with  all  the  cash  in  their  control,  and  this  is, 
in  effect,  the  principle  of  the  Indiana  law. 

CLEARING    HOUSE    CURRENCY   A    COMBINATION    OF 
SPECIAL   AND   GENERAL   LAWS. 

This  clearing  house  system  is  a  combination  of 
the  strongest  features  of  both  the  special  and  gen- 
eral laws  as  regards  the  issue  of  currency.  It  is 
evident  that  by  dividing  all  banks  in  the  country 
into  clearing  house  districts  and  incorporating 
clearing  houses  under  United  States  laws,  it  would 
be  no  difficult  matter  to  extend  it  over  the  whole 
nation,  and  thereby  obtain  a  currency  good  at  every 
clearing  house,  the  features  of  which  have  been 
tested  by  experience  for  fifty  years  and  found 
good.1 

A  system  is  not  complete  which  incorporates 
banks  and  leaves  clearing  houses  to  be  organized 
under  local  laws.  The  national  law  should  provide 
for  the  incorporation  of  clearing  houses,  so  that 
their  action  shall  be  uniform.  To  protect  the  as- 
sociation in  its  guarantees,  power  should  be  given 
it  to  declare  any  bank  insolvent  which  did  not 
make  its  collateral  satisfactory  on  demand,  and  it 
should  be  a  preferred  creditor  until  the  notes  issued 
were  paid. 

1  This  suggestion  is  elaborated  more  fully  in  chapters  xi.  and. 
xii.  entitled  "  The  Completion  of  the  National  Banking-  System  " 
and  "  Fixed  and  Redeemable  Currency."  See  pp.  152,  159. 


198     HISTORY  OF  CURRENCY  IN   THE   U.  S. 

The  watchfulness  over  the  business  methods  and 
practices  of  associated  banks,  which  lies  at  the  basis 
of  such  a  system,  would  be  a  great  protection  to  the 
community.  A  bankers'  association  would  then 
mean  more  than  pleasant  social  intercourse.  Its 
rules  and  regulations  would  then  have  the  full  effect 
of  laws,  with  power  to  enforce  them.  The  clearing 
house  then  would  take  the  position  which  the  board 
of  directors  of  a  state  bank  occupied  toward  the 
branches,  who  transacted  no  business  except  with 
them. 

The  fundamental  distinction  between  the  special 
and  general  state  banking  laws,  then,  is  found  in 
the  methods  adopted  for  the  issue  of  currency. 

THE   RISE    OF   THE    PRINCIPLE    OF   A   SECURED 

CURRENCY. 

The  issue  of  a  secured  currency  marks  the  rise 
of  a  new  principle  in  banking,  and  it  is  therefore 
well  to  endeavor  to  trace  it  to  its  source. 

This  new  principle,  as  has  been  said,  took  shape 
in  this  country  first  in  the  New  York  law  of  1838. 
It  was  incorporated  also  in  the  charter  of  the  Bank 
of  England  in  1844,  six  years  subsequently  to  the 
enactment  of  the  New  York  law.  By  a  reference 
to  the  public  discussions  of  that  time  in  England, 
it  would  appear  that  the  proposal  for  a  secured 
currency  was  made  at  least  as  early  as  1825,  and 
perhaps  earlier.  Lord  Liverpool  declared,  in  1825, 
"  that  a  system  (of  banking)  was  wanted  which 
would  exclude  the  possibility  of  discredit  and  bank- 
ruptcy, by  preventing  every  individual  or  associa- 


VARIOUS   OPINIONS  199 

tion  from  issuing  notes  without  an  adequate  guar- 
antee." 

In  1826  Henry  Drummond  wrote  :  "  It  is  further 
proposed  that  all  issuers  of  notes  should  deposit  a 
security  for  the  notes  which  they  issue." 

Joplin,  in  his  "  Essay  on  Banking '  (1827), 
wrote  :  "  Two  chief  plans  for  the  protection  of  the 
public  against  improper  banking  are,  first,  to  compel 
bankers  to  register  their  property,  and,  secondly, 
to  give  security  for  their  notes  in  circulation." 

INFLUENCE    OF   WEBSTER'S    OPINION. 

Lord  Overstone  wrote  in  a  pamphlet,  issued  in 
1840  :  "  The  two  things,  the  management  of  a  paper 
currency  and  the  management  of  banking  depos- 
its, cannot  be  blended  together  in  one  system  and 
treated  as  subject  to  the  same  laws  and  to  be  gov- 
erned by  the  same  principles/'  He  quoted  with 
approval  from  Webster's  speech  of  March  12, 1838, 
on  the  Sub-Treasury  Bill,  where  he  expressed  the 
belief  that  "  a  national  bank  might  be  established 
with  more  regard  to  its  Junctions  of  regulating 
currency  than  to  its  function  of  discount"  This 
quotation  he  used  with  impressive  effect,  and  in  a 
manner  most  complimentary  to  Webster,  in  advo- 
cating the  separation  of  those  functions  in  the  Bank 
of  England. 

James  De  Peyster  Ogden  (New  York,  1840) 
writes:  "  An  opinion  prevails  in  England  that  there 
should  be  a  bank  of  issue  distinct  from  a  bank  of 
discount,  and  Mr.  Loyd  (afterwards  Lord  Over- 
stone),  in  his  late  pamphlet,  favors  the  idea,  but 


200     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

suggests  no  plan."  "We  should  not  have  thought 
it  necessary  to  allude  to  this  proposed  experiment, 
had  we  not  found  that  an  idea  had  been  occasion- 
ally expressed  in  favor  of  the  feasibility  of  some 
principle  of  the  kind  in  this  country."  He  then 
proceeds  to  argue  against  the  New  York  law.  So 
it  would  appear  that  the  suggestion  of  a  secured 
currency  came  to  New  York  from  England,  where 
it  first  arose  after  the  banking  troubles  which  cul- 
minated in  1825,  and  it  was  carried  into  effect  both 
in  New  York  and  in  London,  as  a  sequence  of  the 
panic  of  1837.  This  great  principle  was  therefore 
the  joint  product  of  the  currency  debates  in  Eng- 
land and  America,  and  its  object  was,  as  Lord 
Liverpool  said,  "  to  exclude  the  possibility  of  dis- 
credit and  bankruptcy." 

A  SECURED  CURRENCY  THOUGHT  TO  BE  A 

PANACEA. 

In  the  history  of  every  panic,  and  the  remark  is 
true  of  every  form  of  public  calamity,  it  is  to  be 
noticed  that,  after  its  first  effects  have  passed  away, 
the  minds  of  legislators  and  business  men  have 
been  occupied  with  the  framing  of  devices  intended 
to  prevent  a  recurrence  of  similar  troubles. 

The  separation  of  the  banking  department  from 
the  department  of  issue  and  the  securing  of  the 
circulation  of  the  Bank  of  England  was  the  fruit 
of  the  troubles  which  culminated  in  the  panic  of 
1837. 

It  was  then  fondly  hoped  that  the  secret  had 
been  discovered  by  which  future  panics  might  be 


SEPARATION  OF  FUNCTIONS  201 

avoided.  No  panic  of  equal  extent  and  violence 
to  that  of  1837  has  since  visited  the  commercial 
world,  and  that  fact  has  110  doubt  been  due  in  large 
measure  to  the  introduction  and  adoption  of  the 
principle  of  a  secured  currency  and  the  accumula- 
tion of  a  great  mass  of  gold  which  it  necessitates. 
That  panics  have  since  occurred  should  lead,  not 
to  the  abandonment  of  the  principle,  but  to  its  still 
further  adjustment,  so  that  it  may  accomplish  all 
that  has  been  hoped  from  it. 

PEEL'S  LAW  OF  EQUILIBRIUM  NOT  A  NECESSARY 
PART  OF  SEPARATION. 

The  "  fantastic  theory,"  as  MacLeod  calls  it,  for 
the  regulation  of  the  currency  by  the  "  law  of  equi- 
librium," contained  in  Peel's  act,  which  has  often 
been  condemned  as  contrary  to  the  principles  of 
the  Bullion  Report  of  1810,  and  of  common  sense, 
need  not  be  referred  to.  The  primary  object  of 
the  New  York  law  of  1838,  and  of  the  bank  charter 
of  1844,  was  the  same  ;  that  is,  to  make  a  separa- 
tion between  the  two  functions  of  a  bank,  general 
banking  and  the  issue  of  currency,  and  to  provide 
security  for  the  latter. 

REASONS   FOR   SEPARATION    OF  ISSUE   DEPARTMENT 
IN    BANK    OF   ENGLAND. 

One  of  the  reasons  for  this  separation  was  stated 
by  Lord  Overstone  to  be  the  liability  to  the  abuse 
of  the  power  of  issue.  Experience  has  shown  that 
this  is  inevitable  ;  that  the  facility  of  issuing  cur- 
rency is  fatal,  the  temptation  to  make  money  by 


202    HISTORY  OF  CURRENCY  IN  THE   U,  S. 

the  use  of  legal  privileges  to  their  fullest  extent 
overcomes  prudence  and  conservatism.  It  is  too 
great  a  temptation  for  the  average  bank  officer 
to  resist,  and  it  is  necessary  to  guard  against  the 
dangers  which  result  therefrom  by  provisions  made 
part  of  the  banking  law.  The  restraints  of  wisdom, 
experience,  public  opinion,  prudence,  and  self-in- 
terest are  not  enough.  As  Washington  said,  "  In- 
fluence is  not  government."  So,  in  the  case  of 
banks,  the  principle  must  be  stated  in  the  law  if 
we  would  have  it  govern. 

Colonel  Torrens,  who  with  S.  J.  Loyd  (after- 
wards Lord  Overstone)  shares  the  credit  of  the 
change  in  the  charter  of  the  Bank  of  England  by 
which  the  issue  department  was  separated  from  the 
banking,  and  the  currency  was  secured  by  gold  and 
government  bonds,  wrote  in  defense  of  Sir  Robert 
Peel's  bill  that  Parliament  had  "  committed  a  mis- 
take in  delegating  to  the  directors  of  the  Bank  of 
England  the  important  functions  of  securing  the 
convertibility  of  the  currency ; '  and  he  gives  in- 
stances prior  to  1844  when  they  abused  that  power, 
which  was  taken  away  from  them  by  Peel's  act. 
In  the  present  day  we  can  do  no  more  than  reecho 
the  words  of  Colonel  Torrens,  "  It  would  be  a  mis- 
take for  Congress  to  give  to  the  directors  of  the 
banks  of  the  United  States  the  liberty  of  issuing 
currency  and  of  holding  the  security  themselves." 


RISKS   OF  THE  NOTE-HOLDER          203 

EXPLOSIVE    CHARACTER    OF    AN    UNSECURED    CUR- 
RENCY. 

But  the  most  serious  objection  to  the  demand 
that  the  banks  shall  have  this  liberty  is  in  the  fact 
that  it  would  imperil  the  financial  situation  by  in- 
creasing: the  obligations  of  banks  in  their  most 

o  o 

"explosive"  form.  The  distinction  between  a  de- 
mand from  depositors  and  from  note-holders  is  very 
clear.  Depositors  do  a  current  business  with  a 
bank  and  are  bound  to  it  by  favors  past,  present, 
and  prospective.  Note-holders  have  no  such  rela- 
tions, and  when  the  credit  of  a  bank  is  blown  upon 
they  send  in  its  notes  for  payment  as  rapidly  as 
they  can  be  gathered.  If  there  is  no  trustee  to 
take  care  of  the  interests  of  the  note-holder,  he 
must  act  for  himself.  This  he  does  in  short  order, 
by  presenting  the  notes  for  redemption.  Not  one 
note,  but  all  may  be  expected  to  be  presented. 
One  run  starts  another,  and  there  can  be  no  mutual 
support.  Such  a  currency  is  deceptive.  It  masquer- 
ades as  true  and  honest  money  until  the  mask  falls, 
when  it  is  seen  to  be  only  a  bank's  debt  of  uncer- 
tain and  unknown  value. 

The  more  there  is  of  this  kind  of  currency,  the 
greater  the  disaster  when  a  panic  overtakes  a  com- 
munity. It  contracts  in  a  panic  with  fearful  velo- 
city. If  it  is  issued  again  it  will  be  returned  for 
payment  the  next  day.  It  affords  no  relief  in  time 
of  trouble  ;  but,  on  the  contrary,  is  the  greatest 
source  of  bankruptcy  among  banks  which  short- 
sighted and  inexcusable  folly  has  yet  devised. 


204     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

In  quiet  waters  sometimes  unseaworthy  boats 
win  races  from  their  stouter  competitors.  So,  in 
times  of  undisturbed  tranquillity,  a  chartered  bank, 
in  being  able  to  issue  its  currency  directly  to  bor- 
rowers, has  an  advantage  over  a  bank  that  must 
first  buy  bonds  or  make  some  other  arrangement 
to  get  currency.  But  this  defect  is  remedied  to  a 
great  degree  if  commercial  assets  may  be  pledged. 
The  advantage,  then,  which  a  chartered  bank  has 
is  slight,  for  both  would  first  loan  their  own  re- 
sources, and  when  the  opportunity  or  necessity 
came  for  the  issuing  and  loaning  of  currency,  the 
routine  of  making  an  application  to  a  clearing 
house  would  not  present  an  appreciable  difficulty, 
while  the  great  point  of  security  for  the  currency 
issued,  in  which  the  public  has  everything  at  stake, 
would  be  gained. 

SECUKED    CURRENCY   COMMANDS    CONFIDENCE. 

How  different  from  an  unsecured  currency  is  one 
which  is  secured  by  the  pledge  of  convertible  assets, 
be  they  commercial  or  government  securities,  in 
the  hands  of  a  responsible  trustee,  a  treasurer  of  a 
State  or  of  the  United  States,  or  a  committee  of  a 
clearing  house  association,  who  holds  the  security 
for  the  benefit  of  the  note-holder.  There  is  no 
mask  to  fall  from  it.  Confidence  in  it  rests  not  on 
the  bank  issuing  the  notes,  but  on  the  security 
pledged,  which  is  of  well-known  character,  or  has 
been  approved  by  competent  persons  who  are  in- 
terested in  protecting  themselves  against  a  contin- 
gent loss,  and  on  the  character  of  the  trustee. 


EMERGENCY  CURRENCY  205 

In  no  panic  has  the  redemption  of  national  bank 
notes  been  a  source  of  trouble  to  the  bank  issuing 
them.  On  the  contrary,  all  eyes  are  turned  at  such 
times  in  the  direction  of  additional  issues  of  bank 
notes  as  a  measure  of  relief.  But  commercial  banks 
do  not,  and  should  not,  own  government  bonds  to 
any  extent,  and  their  commercial  assets  are  not 
receivable  as  security  for  currency.  Consequently, 
the  legal  mode,  under  the  present  law,  in  which  the 
currency  might  be  made  elastic,  is  closed  to  the 
banks  in  their  time  of  greatest  need.  It  was  for 
this  reason  that  the  banks  of  New  York  have  at 
various  times  turned  to  the  only  way  by  which  a 
substitute  for  currency  could  be  procured,  and  in 
the  issue  of  clearing  house  certificates  they  pro- 
vided themselves  with  an  emergency  currency 
which,  though  limited  in  use,  imperfect  in  form, 
and  extra-legal  in  character,  brought  widespread 
and  great  relief  to  the  community.  This  action  by 
the  banks  of  New  York,  from  1857  to  1893,  illus- 
trates the  principle  that  a  currency,  to  be  a  relief 
to  the  business  community,  must  be  issued  on  ap- 
plication by  the  banks,  and  on  a  pledge  of  security 
of  approved  character  with  a  trustee  of  acknow- 
ledged standing  before  the  nation. 

The  vital  advantage  nowadays  in  a  bank  cur- 
rency is  to  provide  a  safety  valve  to  avoid  explo- 
sions. The  universal  use  of  checks  and  the  rapidity 
of  communication  by  railroad,  mail,  and  telegraph, 
make  currency  of  less  importance  in  daily  business, 
except  as  change.  The  words  of  the  Bullion  Re- 
port of  1810  may  be  used  to  describe  the  chief 


206     HISTORY  OF  CURRENCY  IN  THE   U.  S. 

service  of  a  bank  currency,  which  is  to  afford  the 
true  remedy  for  that  occasional  failure  of  confi- 
dence to  which  our  system  of  paper  credit  is  un- 
avoidably exposed. 

DEDUCTIONS. 

The  deductions  made  from  this  discussion  of  the 
history  of  the  currency  are :  — 

First.  Issues  of  currency  by  a  bank  which  holds 
the  security  thereto  in  its  own  hands,  of  which 
the  specially  chartered  bank  is  the  model,  add  to 
its  burdens  and  obligations.  The  inducement  to 
these  issues  are,  that  they  are  a  source  of  profit  to 
the  issuer  and  of  temporary  accommodation  to  the 
borrower.  In  time  of  panic  such  issues  have  a  dis- 
astrous effect  in  rapidly  depleting  the  cash  reserves 
of  the  bank,  and  are  a  mockery  and  embarrass- 
ment. Customers  are  compelled  by  this  note  con- 
traction to  incur  unnecessary  losses  for  the  protec- 
tion of  the  bank.  The  operation  of  such  a  currency 
is,  first,  to  stimulate  business  to  an  unhealthy  ac- 
tivity by  means  of  an  increased  note  circulation, 
and  then  to  wreck  it  by  a  forced  liquidation  on  a 
market  bare  of  purchasers  to  provide  the  bank  with 
funds  to  pay  its  notes. 

Second.  Issues  of  currency  on  specific  pledge  of 
approved  convertible  collateral  security,  such  as 
government  bonds  or  commercial  assets,  to  a  bank 
of  which  one  organized  under  a  general  law  is  the 
model,  add  to  its  cash  resources,  and  are  a  support 
and  defense  to  the  commercial  world  in  time  of 
panic.  They  enable  the  bank  to  accommodate  its 


DEFENSE  AGAINST  PANICS  207 

customers  when  they  are  most  in  need,  and  thus 
cause  the  machinery  of  business  to  move  on  smoothly 
and  without  disturbance. 

In  such  a  system  may  be  combined  the  best  fea- 
tures of  special  and  general  laws,  and  from  that 
combination  may  be  secured  a  defense  against 
monetary  panics,  which  will,  as  J.  R.  McCulloch l 
says,  "  mitigate,  if  not  entirely  obviate,"  their  evil 
results. 

1  In  his  edition  (1849)  of  Adam  Smith,  p.  502. 


APPENDIX 


STATEMENTS  OF  THE  VIEWS  OF  VARIOUS  WRITERS 
REFERRED  TO  IN  THE  PREFACE 

PLAN    OF    CHARLES    PARSONS,    OF    ST.  LOUIS. 

CHARLES  PARSONS,  President  of  the  State  Bank  of 
St.  Louis,  and  an  Ex-President  of  the  American  Bank- 
ers' Association,  seeing  the  article  in  the  "  Bankers'  Mag- 
azine "  on  "  The  Completion  of  the  National  Banking 
System,"  sent  me  under  date  of  October  10, 1893,  a  copy 
"  of  a  proposition,"  he  writes,  "  which  I  sent  Mr.  Car- 
lisle on  August  1st  last,  and  which  I  drew  up  in  1884. 
Of  course  this  plan  would  have  to  be  put  in  legal  shape 
for  a  bill  to  put  before  Congress."  Mr.  Parsons's  na- 
tional prominence  as  a  banker  gives  the  greatest  weight 
to  his  suggestion,  and  I  copy  the  plan  in  its  entirety. 

A  Plan  for  a  United  States  Clearing  House  Currency 

for  Emergencies. 

I  propose  that  Congress  pass  a  law  for  the  issue  of  from 
seventy-five  to  one  hundred  million  of  dollars  of  currency 
notes  solely  for  use  during  times  of  financial  panic. 

These  notes  shall  be  printed  and  prepared  for  use  under 
direction  of  the  United  States  Treasury  Department  ;  shall 
be  countersigned  by  the  Treasurer  and  registered  by  the 
Register. 

They  shall  be  delivered  to  the  various  clearing  houses  of 
the  country  in  such  proportions  as  the  importance  of  the 
place  in  business  warrants,  none,  however,  to  be  delivered 


210  APPENDIX 

to  any  place  having  less  than  $5,000,000  of  banking  capital 
represented  in  its  clearing  house. 

A  committee  of  five  shall  be  appointed  to  consider  appli- 
cations for  loans  of  this  currency  by  banks  in  each  clearing 
house,  and  the  Bank  Examiner  for  the  district,  or  some 
person  well  acquainted  with  the  value  of  securities  and  the 
business  men  of  the  city,  shall  be  appointed  by  the  Secretary 
of  the  Treasury,  and  shall  be  an  additional  member  of  said 
committee. 

This  committee  shall  receive  from  applying  banks  good 
bills  receivable  maturing  and  not  having  more  than  four 
months  to  run,  or  good  interest-paying  bonds  of  States, 
counties,  and  cities  of  the  United  States,  or  first  mortgage 
bonds  of  dividend-paying  railroads,  and  shall  issue  to  such 
banks,  in  reasonable  amounts  as  the  committee  deems  wise, 
8750  for  each  $1,000  of  security  thus  deposited;  for  which 
the  borrowing  bank  shall  execute  and  deliver  its  collateral 
bill  payable,  with  pledge,  which  shall  become  due  not  more 
than  four  months  from  date  of  issue  at  farthest,  and  draw 
interest  at  six  per  cent,  per  annum.  The  committee  may 
reduce  the  time  the  bill  payable  has  to  run  in  its  discretion 
or  to  suit  the  borrowing  bank. 

Before  any  currency  shall  be  delivered  to  any  clearing 
house,  its  members  shall  bv  a  unanimous  vote  agree  to  be- 

«/  o 

come  responsible  for  the  ultimate  redemption.  If  a  special 
law  is  required  to  authorize  such  guaranty,  it  shall  become  a 
part  of  this  bill. 

The  banks  securing  the  currency  from  the  committees  shall 
also  agree  to  redeem  it  as  it  is  presented  at  their  duly  named 
agency  in  the  city  of  New  York,  and  a  failure  to  redeem  it 
shall  cause  the  bill  payable  given  for  it  to  become  due  and 
payable  at  once,  and  the  issuing  committee  shall  be  author- 
ized to  sell  the  pledged  securities  and  redeem  said  currency 
without  any  delay. 

The  notes  of  which  this  currency  is  to  be  composed  shall 
be  of  various  denominations,  from  five  to  twenty  dollars, 
and  are  to  be  considered  as  emergency  notes,  and  the  neces- 
sity and  time  of  their  issue  shall  be  fixed  by  the  President 
of  the  United  States  whenever  he  deems  there  is  an  emer- 


PLAN  OF  CHARLES  PARSONS          211 

gency  in  which  the  public  interests  and  the  financial  condi- 
tion of  the  country  require  it  ;  and  notice  shall  be  publicly 
given  by  him  when  he  so  considers  the  necessity  to  exist. 

Within  six  months  from  the  date  on  which  the  President 
shall  order  the  issue  of  this  currency  to  the  clearing  houses 
of  the  country,  each  clearing  house  shall  return  said  currency 
taken  by  it  to  the  Treasurer  of  the  United  States,  and  for 
and  in  place  of  any  such  notes  as  it  may  not  be  able  to  thus 
return  (by  reason  of  being  in  circulation),  gold  or  United 
States  legal  tender  money  may  be  paid  over,  which  shall  be 
held  by  the  government  for  the  redemption  of  such  un- 
returned  notes. 

The  interest  secured  from  the  loans  made  under  this  law 
shall  be  divided  as  follows  :  — 

First.  The  expense  of  preparing  the  currency  and  its 
transmission  to  the  various  clearing  houses  shall  be  remitted 
to  the  United  States  Treasurer  on  receipt  by  the  various 
clearing  houses,  in  proportion  as  they  have  received  of  the 
currency. 

Second.  One  fourth  (£)  of  the  remainder  shall  be  paid  to 
the  United  States  Treasurer  to  be  by  him  turned  into  the 
treasury,  and  the  remainder  shall  belong  to  the  clearing 
houses,  to  be  divided  by  them  among  the  banks  in  propor- 
tion to  the  value  represented  by  each  (counting  capital  and 
accumulated  surplus)  as  guarantors  of  the  loans  made. 

The  final  settlement  of  interest  shall  be  made  and  balance 
due  the  government  paid  over  within  six  months  from  the 
date  of  the  President's  order  for  issue  of  the  currency. 

The  general  management  of  the  issue  of  the  currency 
might  be  under  the  same  department  of  the  treasury  as 
that  of  the  national  banks.  The  currency  is  to  be  signed  by 
the  president  and  manager  of  each  clearing  house  issuing  it. 

EXPLANATION. 

The  object  of  this  currency  is  to  provide,  when,  as  in  1857 
and  1873  and  now,  the  people  become  unduly  excited  and 
distrustful,  being  disposed  to  withdraw  money  from  solvent 
banks,  thus  curtailing  the  capacity  of  such  institutions  to 
accommodate  the  public,  imperiling  the  existence  of  solvent 


212  APPENDIX 

and  well  managed  banks,  producing  also  unreasonable  de- 
clines in  the  values  of  various  reliable  and  safe  bonds  and 
stocks,  closing  up  factories,  throwing  out  of  occupation  wor- 
thy and  industrious  citizens,  ending  in  a  wild  and  senseless 
scramble  for  money,  that  the  emergency  currency  shall  be 
forthcoming  to  supply  the  place  of  that  withdrawn  by  a 
frightened  public  from  the  banks. 

This  currency  bears  on  its  face  not  a  guaranty  of  the 
government,  but  has  its  stamp  and  register,  like  the  national 
bank  note,  to  show  that  it  is  under  its  care  and  watch.  It 
would  be  issued  against  a  genuine  value  to  solvent  parties, 
and  will  be  secured,  first,  by  the  guaranty  of  each  clearing 
house,  and,  secondly,  by  the  banks  receiving  it,  with  their 
best  securities  behind  it. 

I  limit  the  issue  to  towns  having  $5,000,000  bank  capi- 
tal, as  I  wish  to  have  the  character  of  the  currency  above 
dispute,  so  that  it  will  circulate  freely  and  have  every  ele- 
ment of  safety  to  gain  public  confidence. 

I  provide  for  its  redemption  within  six  months,  because 
otherwise  it  would  not  be  an  emergency  currency,  but  likely 
to  be  permanent,  and  thus  we  would  lose  this  avenue  of  relief 
in  times  of  public  danger  such  as  now  exists. 

This  plan  I  suggested  in  1884,  but  as  the  panic  was  then 
short  and  comparably  feeble,  did  not  put  it  before  the  pub- 
lic. I  now  submit  it  as  perhaps  affording  a  means  of  great 
benefit. 

CHARLES  PARSONS. 

ST.  Louis,  Mo.,  August  1,  1893. 

In  order  to  facilitate  the  success  of  this  plan,  I  further 
recommend  the  passage  of  a  bill  by  Congress  authorizing 
the  issuing  of  charters  to  the  various  clearing  houses  in  the 
country,  providing  for  the  receipt  by  them  of  such  currency 
as  is  spoken  of  herein,  and  its  signature  and  issue  to  the 
various  banks  in  each  of  them  within  limits  named. 

CHARLES  PARSONS. 
ST.  Louis,  Mo.,  November  13,  1897. 

Since  Mr.  Parsons  now  adopts  the  incorporation  of 
clearing  houses  under  a  federal  law,  there  remains  only 


PLAN  OF  EDWARD  ATKINSON         213 

the  recognition  of  state  boundaries,  so  as  to  give  a  clear- 
ing house  of  issue  to  each  State,  the  acceptance  of  the 
clearing  house  currency  by  all  clearing  houses,  and  sev- 
eral minor  provisions,  as  the  reason  for  the  preparation 
of  another  scheme.  But  these  additions  and  the  for- 
mulation of  the  whole  in  a  workable  bill,  and  the  for- 
tification of  the  plan  by  an  appeal  to  history,  the 
experience  of  other  countries,  and  to  the  principles  of 
political  economy,  seemed  called  for  to  secure  a  full  un- 
derstanding of  the  subject,  and  that  work  has  been 
attempted  in  this  volume.  Mr.  Parsons  writes  :  "  So 
far  as  my  opinion  of  it  goes,  this  new  currency  plan 
will  finally  dispense  with  United  States  treasury  notes." 

PLAN    OF   EDWARD    ATKINSON,    OF    BOSTON. 

After  the  introduction  of  my  bill  in  Congress,  I  learned 
that  Mr.  Edward  Atkinson  had  proposed  a  similar  idea, 
and  at  my  request  he  kindly  sent  me  a  copy  of  an  ad- 
dress on  Finance  and  Banking,  delivered  at  the  dinner 
of  the  Boston  Boot  and  Shoe  Club,  December  17,  1890. 

In  that  address  he  gives  the  rough  draft  of  an  act 
which  he  believed  would  establish  confidence  and  credit. 
I  quote  as  follows  :  — 

I  think  my  plan  will  be  most  easily  comprehended  by 
reciting  the  main  provisions  of  this  act. 

An  act  authorizing  national  banks  to  issue  secured  notes, 
which  may  serve  as  a  circulating  medium,  in  addition  to  the 
bank  notes,  now  authorized  and  now  secured  by  the  deposits 
of  United  States  bonds. 

Be  it  enacted  that  any  banks  having  an  aggregate  cap- 
ital of  $  in  each  of  the  districts  bounded  and  described 
as  follows,  to  wit :  (No.  1,  2,  3,  etc.,  by  boundaries)  of  which 
the  following  cities  may  be  held  to  be  the  respective  centres 
(No.  1,  2,  3,  etc.),  may  organize  a  clearing  house  in  each  of 
the  said  cities  respectively,  for  the  following  purposes  and 
with  the  following  lawful  powers  in  addition  to  the  cus- 


214  APPENDIX 

tomary  powers  usually  conferred  upon  a  clearing  house  asso- 
ciation by  the  banks  which  now  belong  to  such  associations 
which  are  not  covered  by  or  made  a  part  of  this  act. 

After  prescribing  the  manner  of  organizing  such  clearing 
houses,  designating  the  officers  and  defining  their  respective 
duties,  the  lawful  powers  conferred  might  be  substantially 
in  the  following  form  :  — 

I.  Any  national  bank  in  each  of  said  districts  may  place 
in  the  charge  of  the  finance  committee  of  said  clearing  house, 
securities  in  which  no  more  than         per  cent,  of  the  capital  of 
said  bank  may  be  invested  ;  which  securities  shall  be  subject 
to  change  or  to  addition  thereto  upon  the  demand  of  the 
finance  committee  of  said  clearing  house,  whenever  any  of 
said  securities  shall  become  unsatisfactory  to  them.     Such 
securities  shall  also  be  subject  to  be  changed  from  time  to 
time,  with  the  assent  of  the  finance  committee  of  the  clear- 
ing house,  according  to  the  convenience  or  necessity  of  the 
business  of  the  depositing  bank. 

II.  Upon  the  deposit  of  such  securities,  satisfactory  in 
amount  and  quality  to  the  finance  committee  of  said  clearing 
house,  this  fact  shall  be  certified  to  the  executive  officers  of 
the   clearing  house  ;  such  officers  shall  then  issue  clearing 
house  certificates  printed  in  the  form  of  bank  notes,  in  sums 
of  not  less  than  one  dollar  or  more  than        dollars.    On  the 
back  of  said  certificates  there  shall  be  a  statement  that  the 
bank  named  in  such  certificate  has  deposited   securities  in 
amount  and  quality  satisfactory  to  the  clearing  house,  valued 
at  25  per  cent,  in  excess  of  the  amount  of  the  certificates  of 
which  this  certificate  number  constitutes  one   of  series 
number            This  certificate  is  issued  subject  to  an  agree- 
ment by  said  bank  to  maintain  the  amount  of  securities  held 
by  the  clearing  house,  so  that  the  sum  of  said  securities  in 
the  estimation  of  the  committee  shall  at  no  time  be  less  than 
25  per  cent,  in  excess  of  the  amount  of  certificates  issued 
thereon.     In  consideration  of  which  deposit  of  securities,  and 
for  other  good  and  valuable  considerations,  the  said  clearing 
house  hereby  guarantees  the  payment  or  redemption  of  this 
note  on  demand  in  lawful  money  by  said  bank.     In  default 
of  such  payment,  said  clearing  house  will  promptly  redeem 


PLAN  OF  EDWARD  ATKINSON         215 

this  note  at  par  in  lawful  money,  and  may  then  sell  the  securi- 
ties deposited  with  it  to  recover  the  amount  due.  In  witness 
of  which  obligation  the  said  clearing  house  binds  itself  by 
its  seal  and  its  obligation  thereto  affixed.  (The  method  of 
executing  the  obligation  left  for  further  consideration.  Pro- 
vision to  be  made  for  the  certificates  of  each  clearing  house 
district  to  be  printed  in  such  different  colors  or  combina- 
tions that  the  sorting  may  be  facilitated.  Provision  also  to 
be  made  to  make  each  clearing  house  the  primary  place  of 
redemption,  so  that  the  work  of  redemption  may  be  very 
simple.) 

III.  Upon  the  reverse  side  of  the  note  on  which  this  obli- 
gation of  the  clearing  house  shall  have  been  executed,  the 
bank  to  which  these  certificates  shall  have  been  issued  shall 
cause  to  be  printed  or  inscribed  in  the  usual  manner  its 
obligation  to  pay  in  lawful  money  on  demand  the  specific 
sum,  one  dollars,  as  the  case  may  be,  corresponding  to 

the  sum  named  in  the  certificate  given  by  the  clearing  house, 
which  obligation  shall  be  executed  in  due  form,  and  signed 
by  the  president  and  cashier  of  said  bank. 

Section  No.  IV.  may  be  framed  so  as  to  relieve  these  notes 
from  the  tax  on  circulation,  to  which  any  notes  issued  by 
state  banks  are  now  subject. 

Subsequent  sections  may  be  framed  so  as  to  provide  for 
subjecting  this  branch  of  the  business  of  the  national  banks 
and  also  the  clearing  houses  authorized  to  do  this  business,  to 
examination  under  the  direction  of  the  Comptroller  of  the 
national  banks,  of  the  same  kind  and  in  the  same  manner  as 
that  to  which  all  national  banks  are  now  subject  in  respect 
to  the  business  which  they  are  now  authorized  to  transact. 

Also  sections  may  be  framed  prescribing  the  manner  of 
printing  the  clearing  house  obligations  and  notes  for  registry 
under  the  supervision  of  the  Comptroller. 

I  submit  that  in  this  way  absolute  security  may  be  imparted 
to  the  note  circulation,  prompt  redemption  may  be  assured, 
stability  will  be  imparted  to  all  credit  which  is  based  on  ade- 
quate capital  and  character,  while  at  the  same  time  no  jeal- 
ousy will  be  excited  such  as  would  be  aroused  by  renewing 
a  proposal  for  a  great  national  bank.  Each  clearing  house 


216  APPENDIX 

would  be  a  check  upon  the  next  so  that  not  one  could  exist 
which  was  not  safely  administered,  while  in  the  end  the  sys- 
tem would  lead  to  the  authorization  and  establishment  of 
branches  of  the  banks  in  the  smaller  towns  where  the  busi- 
ness would  not  warrant  a  separate  bank,  thus  incorporating 
in  our  own  system  the  most  beneficent  feature  of  the  Scotch 
method. 

Next  Saturday's  Brad  street  will  contain  the  rough  draft  of 
the  Act,  which  is  now  being  dealt  with  by  some  of  my  friends, 
who  are  perhaps  more  competent  than  I  am  in  this  branch  of 
the  work,  with  a  view  to  perfecting  it. 

If  Mr.  Atkinson's  plan  had  recognized  state  bounda- 
ries and  had  provided  that  notes  issued  by  one  clearing 
house  should  be  accepted  by  all  others  throughout  the 
nation,  thus  maintaining  them  at  par,  and  had  contained 
a  few  other  practical  features,  it  would  have  accomplished 
all  the  objects  desired.  But  his  proposal  lacked  these 
essential  provisions  for  a  universal  system,  and  he  seems 
never  to  have  put  it  into  the  shape  of  a  bill  that  he  was 
willing  to  have  introduced  in  Congress.  He  consulted 
some  friends,  forgetting  the  axiom  that  a  council  of  war 
never  fights.  As  he  has  not  advocated  the  idea  in  recent 
years,  it  must  be  presumed  that  his  interest  in  the  plan 
for  some  reason  has  not  been  sustained. 

The  criticism  on  Mr.  Atkinson's  plan  from  bankers  in 
interior  cities,  like  Saint  Paul  and  Minneapolis,  was  that 
clearing  house  currency  issued  and  redeemed  as  provided 
in  his  bill  would  be  the  means  of  depleting  the  reserves 
of  country  banks  and  would  therefore  be  as  dangerous 
as  paying  out  legal  money  directly.  Consequently  his 
scheme  was  not  thought  to  propose  any  measure  of  relief 
in  a  money  pressure.  This  objection,  which  is  fatal, 
would  not  hold  if  the  notes  were  accepted  by  all  clear- 
ing houses  at  par,  and  redemption  effected  by  them. 


PLAN  OF  G.  D.  AMBLER  217 


SUGGESTIONS    OF   D.    G.    AMBLER,    OF   JACKSONVILLE, 

FLORIDA. 

Another  proposition  of  somewhat  the  same  character 
was  made  by  Mr.  D.  G.  Ambler,  President  of  the 
National  Bank  of  the  State  of  Florida,  Jacksonville, 
Florida,  in  a  paper  submitted  by  him  at  the  meeting  of 
the  American  Bankers'  Asociation  held  in  Chicago,  in 
1893.  It  is  as  follows  :  — 

1st.  Let  Congress  authorize  national  banks  to  form  asso- 
ciations with  themselves  and  other  banks  for  clearing  house 
and  other  purposes  as  hereinafter  provided  for. 

2d.  Authorize  such  associations  as  have  an  aggregate 
capital  and  surplus  of  $50,000,000  to  issue  circulation  from 
time  to  time,  by  and  with  the  assent  of  the  Secretary  of  the 
Treasury  and  the  Comptroller  of  the  Currency. 

3d.  To  loan  this  circulation  to  its  members  (and  perhaps 
to  others)  on  the  same  security  as  they  now  loan  certificates, 
viz.  :  only  75  per  cent,  of  the  value  of  the  security. 

4th.  For  the  first  15  per  cent,  of  an  amount  equal  to  the 
aggregate  capital  and  surplus  of  the  banks  in  the  associa- 
tion the  rate  of  interest  is  to  be  6  per  cent. 

The  next  15  per  cent,  to  be  7  per  cent.,  and  so  on  up. 

And  any  bank  not  repaying  its  loan  in  six  months  shall 
pay  the  maximum  rate  imposed  on  any,  and  that  to  be  raised 
1  per  cent,  each  month  till  paid. 

5th.  The  interest  thus  paid  for  these  loans,  less  expenses 
of  the  association,  is  to  be  deposited  in  the  Treasury  of  the 
United  States,  to  the  credit  of  the  association,  for  future 
emergencies. 

6th.  As  the  loans  are  paid,  the  same  are  to  be  paid  into 
the  United  States  Treasury  for  the  payment  of  the  circula- 
tion heretofore  provided  for. 

7th.  The  circulation  shall  be  redeemed  at  any  time  by  the 
clearing  house,  and  is  a  legal  tender  to  any  member  thereof. 
Shall  also  be  payable  at  the  nearest  sub-treasury. 

8th.    The  association  shall  keep  as  a  redemption  fund  at 


218  APPENDIX 

all  times  in  the  nearest  sub-treasury  a  sum  of  legal  tender 
money  equal  to  5  per  cent,  of  the  circulation  outstanding, 
less  the  amount  that  may  have  been  deposited  to  redeem 
the  same. 

We  thus  have  a  system  that  legalizes  the  clearing  house 
association  and  makes  it  regular  and  correct  for  any  bank 
to  ask  for  help  for  its  customers.  This  system  also  being 
under  control  of  the  treasury  and  currency  department  of 
the  government. 

We  have  a  circulation  guaranteed  by  associations  of  such 
magnitude  as  to  make  the  circulation  good  beyond  doubt. 
For  instance,  the  New  York  Clearing  House  to-day  repre- 
sents a  capital  and  surplus  equal  to  about  double  the  capital 
of  the  Bank  of  England.  Further,  we  have  as  security 
$100  of  securities  carefully  scrutinized  by  the  association 
for  every  $75  of  circulation  issued.  We  make  such  a  rate 
of  interest  as  insures  the  retirement  of  the  loans,  and  conse- 
quently the  circulation,  or  its  equivalent,  in  six  months  or 
thereabouts,  and  thus  prevent  permanent  inflation.  The 
rates  of  interest  prevent  the  banks  making  use  of  it  save  in 
an  emergency,  but  the  certainty  that  the  relief  can  be  had 
will  prevent  panic  by  insuring  public  confidence.  If  it  is 
said  that  the  banks  would  not  go  into  a  system  with  no 
profits  to  them,  I  say  they  have  done  it  repeatedly.  Wit- 
ness the  clearing  house  certificate,  with  no  profit  or  hope  of 
profit  to  the  bank. 

This  scheme,  while  fragmentary,  shows  that  the  plan 
of  incorporating  clearing  houses  would  have  its  advo- 
cates in  the  South,  as  in  other  parts  of  the  country. 


THE  LATE  ADOLPH  LADENBURG's  ARTICLE  IN  THE 
"FORUM,"  JANUARY,  1896. 

One  of  the  most  able  and  interesting  discussions  of 
this  subject  was  by  the  late  Aclolph  Ladenburg  in  his 
article  in  the  "  Forum  '  of  January,  1896,  which  ap- 
peared on  the  day  the  bill  H.  R.  3338  was  introduced 


VIEWS   OF  ADOLPH  LADENBURG       219 

in   the  House   of   Representatives.     The   following  ex- 
tract will  show  the  nature  of  his  suggestion  :  — 

The  next  important  step  is  the  centralization  of  our 
banking  system  by  careful  development  of  our  clearing 
house  system,  in  such  a  manner  that  the  now  disconnected 
banks  of  this  country  shall  mutually  unite  for  certain  pur- 
poses and  eventually  form  a  national  clearing  house  bank, 
which  would  act  for  this  country  somewhat  in  the  same 
manner  as  the  great  central  banks  of  England,  France,  and 
Germany. 

Briefly,  my  idea  is  about  as  follows  :  — 

Let  banks  of  any  kind,  in  every  city  or  small  district, 
combine  in  the  formation  of  a  kind  of  clearing  house  bank, 
to  whose  regulation  and  inspection  they  would  be  subject,  in 
addition  to  state  or  national  laws. 

Allow  such  clearing  house  banks  to  perform  all  the  func- 
tions now  assumed  by  the  clearing  houses,  and  gradually  to 
extend  the  same  by  acting  as  depositaries  for  bank  reserves, 
etc.,  opening  regular  accounts  and  loaning  its  funds,  but 
doing  business  only  with  its  members. 

Let  the  directors  of  such  clearing  house  banks  be  elected 
in  such  a  way  that  only  a  few  are  changed  every  year,  — 
such  election  to  be  determined  by  the  votes  of  the  members 
according  to  the  average  amount  of  their  deposits  in  the 
year  past,  and  let  the  members  be  responsible  for  their 
clearing  house  bank  in  the  same  proportion  as  their  vote  for 
directors. 

Let  these  city  or  district  clearing  house  banks  combine 
on  the  same  conditions  and  for  the  same  purpose  in  a  state 
clearing  house  bank,  and  eventually  these  state  clearing 
house  banks  could  form  a  national  clearing  house  bank. 
When  this  is  accomplished  we  would  have  a  central  institu- 
tion of  finance,  dealing  with  its  members  only,  which  would 
represent  all  the  banks  of  the  country,  and  be  guaran- 
teed by  them,  and  to  it  should  be  ultimately  delegated  all 
power  to  issue  currency.  It  would  be  the  great  central 
reservoir,  from  which,  indirectly,  every  little  bank  in  the 
United  States  would  derive  its  strength  to  supply  its  cus- 


220  APPENDIX 

tomers  with  bank-balance  money  and  currency,  and  it  would 
by  judicious  management  give  confidence  and  a  stability  to 
commerce  not  hitherto  experienced  in  this  country. 

I  lay  great  stress  on  not  allowing  any  of  the  clearing 
house  banks  to  do  business  with  any  one  except  its  mem- 
bers; but  ultimately  the  national  clearing  house  bank  should 
be  given  limited  power  to  act  as  a  bank  of  deposit  for  the 
government,  and  to  deal  in  gold  to  such  an  extent  as  may 
be  necessary  to  preserve  general  confidence.  Some  national 
legislation  may  be  needed  to  carry  out  this  idea,  but  a  very 
substantial  and  beneficial  beginning  could  be  made  with- 
out it. 

Future  historians  will  refer  to  the  last  decades  of  the 
nineteenth  century  to  show  how  Americans  —  so  great  in 
many  other  respects  —  chased  financial  rainbows,  and  unsuc- 
cessfully tried  all  kinds  of  remedies  for  fancied  and  real  ills 
before  they  intrusted  their  finances  to  properly  trained  men, 
as  they  had  previously  found  it  expedient  to  do  with  their 
army  and  navy,  their  health  departments,  their  courts  of 
justice,  their  colleges,  etc.  Finance  is  not  yet  accepted  as  a 
science  by  us,  probably  because  our  country  is  so  rich  that 
so  far  it  has  been  able  to  stand  unscientific  experiments 
that  would  have  ruined  almost  any  other  nation.  The  Ger- 
mans, who  have  been  forced  by  necessity  to  husband  their 
resources,  have  made  enormous  strides  since  their  finances 
have  been  managed  by  a  great  central  institution  —  the 
Reichsbank  —  under  the  leadership  of  the  best  talent. 
France  and  England  have  long  been  envied  for  the  compara- 
tive stability  and  safety  of  their  finances,  which  is  due  to  the 
workings  of  their  great  central  banks.  We  can  yet  outdo 
them  all,  if  only  we  apply  the  same  common  sense  to  our 
finances  that  we  apply  to  other  departments. 

Ours  is  the  richest  country  in  the  world.  We  should 
be  and  can  be  the  most  powerful  nation  financially  and  every 
other  way ;  but,  to  accomplish  this,  we  must  dispel  all 
doubt  as  to  our  financial  unit,  we  must  centralize  our  bank- 
ing system,  and  we  must  manage  our  finances  on  scientific 
principles. 


SUGGESTION  OF  PROFESSOR  SHER  WOOD     221 

This  clear  and  comprehensive  statement  of  Mr.  La- 
den burg's  views  adds  to  the  regret  all  felt  at  the  loss 
in  their  prime  of  abilities  so  distinguished.  It  would 
be  difficult,  however,  to  draw  a  bill  to  meet  the  require- 
ments of  this  outline,  and  at  the  same  time  avoid  the 
"  prejudices  arising  from  the  history  of  the  former 
United  States  Bank,"  of  which  Mr.  Ladenburg  was 
well  aware.  It  is  natural  for  those  who  have  received 
their  commercial  education  in  a  foreign  country  to 
underestimate  the  acceptance  of  finance  as  a  science  in 
this,  and  to  overestimate  the  value  of  foreign  models 
and  banking  customs.  The  science  of  finance  is  prob- 
ably not  so  well  understood  in  any  other  country  by  so 
large  a  percentage  of  the  people  as  it  is  in  the  United 
States. 

The  difficulty  encountered  in  reconciling  foreign  ideas 
with  the  political  principles  of  our  nation  shows  that 
our  banking  system  must  be  formed  on  the  lines  of  our 
political  faith,  and  by  those  who  are  in  sympathy  there- 
with. 

SUGGESTION    OF   PROFESSOR   SIDNEY    SHERWOOD,    OF 
JOHNS    HOPKINS    UNIVERSITY. 

In  the  "  Review  of  Reviews '  of  January,  1897, 
among  many  expert  opinions  on  currency  reforms,  Pro- 
fessor Sherwood  of  Johns  Hopkins  University  advocates 
the  incorporation  of  clearing  houses,  making  them  the 
redemption  agencies  for  the  issues  of  banks.  His  words 
are  as  follows  :  — 

The  clearing  house  associations  should  be  incorporated 
by  federal  law.  The  various  sub-treasuries  would  be  mainly 
government  agencies  for  dealing  with  the  clearing  house 
associations.  To  the  extent  to  which  the  sub-treasuries 
should  deposit  moneys  with  the  clearing  houses  the  latter 
should,  under  proper  regulation,  be  charged  with  the  obli- 


222  APPENDIX 

gation  of  redeeming  "  greenbacks,"  the  government  then  be- 
ing relieved,  if  it  chooses,  of  the  necessity  of  maintaining 
its  gold  reserve.  Bank  notes  should  no  longer  be  redeem- 
able by  the  government,  but  at  the  respective  clearing 
houses  to  which  the  issuing  banks  belonged,  with  central 
redemption  at  New  York.  This  would  make  the  clearing 
house  in  reality  a  great  banking  corporation,  but  it  would 
simplify  the  whole  machinery  of  banking,  and  would  enable 
the  government  to  go  out  of  the  banking  business  without 
conferring  unrecompensed  privileges  upon  the  banks. 

BILL  H.  R.  171  OF  HON.  J.  H.  WALKER,  CHAIRMAN  OF 
COMMITTEE  ON  BANKING  AND  CURRENCY,  FIFTY- 
FOURTH  CONGRESS. 

To  the  earnestness  with  which  the  Committee  on 
Banking  and  Currency  of  the  Fifty-Fourth  Congress, 
from  almost  the  moment  of  their  appointment,  solicited 
interviews,  expressions  of  opinion,  suggestions  of  mea- 
sures and  drafts  of  bills,  for  the  solution  of  the  finan- 
cial and  banking  ills  of  the  country,  is  in  great  measure 
due  the  preparation  of  the  bill  found  on  page  130. 

For  the  patient  and  attentive  consideration  given  by 
the  Committee  to  all  who  have  made  suggestions  and 
other  communication  to  them,  a  most  hearty  acknow- 
ledgment is  due,  in  which  it  is  my  pleasure  to  join. 

One  cannot  examine  the  volume  of  the  "  Hearings 
and  Arguments  before  the  Committee  on  Banking  and 
Currency  of  the  Fifty-Fourth  Congress,"  without  being 
impressed  with  the  ability  and  great  labor  and  faithful- 
ness to  public  duty  there  manifested. 

While  I  would  not  have  it  supposed  that  there  was 
any  special  approval  of  my  suggestions  by  the  members 
of  the  Committee,  it  is  nevertheless  proper  to  call  atten- 
tion to  the  second  of  the  "  advantages  to  the  banks " 

o 

proposed  to  be  accomplished  by  Chairman  J.  H.  Walker's 
bill  H.  R.  171,  as  follows:  "Second:  A  great  advan- 


BILL   OF  HON.  J.  H.    WALKER  223 

tage  will  be  gained  in  the  system  of  clearing  houses 
provided  for  in  the  bill.  They  will  firmly  unite  all  the 
banks  in  the  country  into  one  system  without  increasing 
the  financial  responsibility  of  one  bank  for  another.  (See 
Appendix  O,  p.  60.)"  The  appendix  here  referred  to 
is  composed  of  the  first  three  pages  of  my  statement 
given  on  page  98  of  this  volume,  which  I  am  gratified  to 
have  the  chairman  adopt  and  incorporate  in  his  argument. 
The  provisions  in  Mr.  Walker's  bill  concerning  clearing 
houses  are  as  follows  :  — 

SEC.  17.  That  the  Comptroller  may  issue  to  the  national 
clearing  house,  provided  for  by  section  sixty-two,  or  to  any 
banking  association  organized  under  this  Act,  the  greenbacks 
described  in  section  six  to  any  amount  approved  of  in  writing 
by  the  Secretary  of  the  Treasury,  in  addition  to  the  amount 
issued  under  section  six  :  Provided,  That  the  association 
applying  for  such  additional  notes  shall  deposit  in  the  United 
States  Treasury  or  sub-treasury  bonds  in  kind  and  amount 
acceptable  to  the  Secretary  of  the  Treasury,  as  security  for 
such  notes,  and  shall  pay  interest  on  the  sum  of  such  notes 
so  issued  at  such  rate  as  is  fixed  by  law  to  be  paid  on  loans 
by  the  State  in  which  the  bank  or  clearing  house  is  located, 
such  interest  on  such  notes  to  be  paid  at  such  time  and  in 
such  manner  as  the  Comptroller  of  the  Currency  may  deter- 
mine. But  a  sum  no  more  than  ninety  per  centum  of  the 
par  value  of  any  bond  shall  be  issued  in  such  greenbacks. 

SEC.  18.  That  any  association  depositing  bonds  and  receiv- 
ing greenbacks  secured  thereby,  as  provided  for  by  section 
seventeen,  may  withdraw  such  bonds  so  deposited  after 
thirty  days  from  the  date  of  such  deposit  upon  paying  the 
accumulated  interest  on  the  notes  issued  upon  the  deposit  of 
such  bonds  up  to  the  date  of  their  withdrawal,  and  in  addi- 
tion to  such  interest  shall  deposit  with  the  Treasurer  lawful 
money  or  greenbacks,  issued  to  associations  under  section 
six  of  this  Act,  or  mixed,  to  an  amount  equal  to  the  green- 
backs issued  to  the  associations  under  section  seventeen 
and  for  which  the  bonds  were  deposited  for  security  ;  but 


224  APPENDIX 

no  more  than  five  per  centum  of  the  greenbacks  issued  to 
any  other  one  association  under  section  six  of  this  Act  shall 
be  accepted  as  a  deposit  for  the  withdrawal  of  such  bonds. 

SEC.  19.  That  the  notes  deposited  for  the  withdrawal  of 
bonds  shall  be  immediately  put  in  redemption  and  the  money 
received  for  them  shall  be  kept  as  a  special  fund  with  which 
to  redeem  and  destroy  the  amount  of  greenbacks  issued  to 
the  association  under  section  seventeen  of  this  Act,  and  such 
greenbacks  shall  be  destroyed  equal  in  amount  to  the  green- 
backs issued  to  the  association  when  the  bonds  hereinbefore 
mentioned  were  deposited  to  secure  such  notes. 

SEC.  57.  That  any  five  or  more  national  banking  associa- 
tions are  hereby  authorized  to  unite  in  forming  a  clearing 
house  association.  By  adopting  a  constitution  and  by-laws 
the  banking  associations  certifying  the  Comptroller  of  the 
Currency  that  fact  shall  in  that  act  become  a  clearing  house 
association  body  corporate,  upon  such  constitution  and  by- 
laws being  approved  in  writing  by  the  Comptroller  of  the 
Currency. 

SEC.  58.  That  any  changes  in  the  constitution  or  by-laws 
of  any  such  association,  to  become  valid,  must  be  approved 
in  writing  by  the  Comptroller  of  the  Currency,  and  the  Comp- 
troller may  annul  any  part  of  the  same  at  any  time  after  a 
hearing  thereon,  with  the  concurrence  of  a  majority  of  all 
the  board  of  advisers. 

SEC.  59.  That  clearing  house  associations  shall  be  subject 
to  like  examination  by  national  bank  examiners  as  national 
banking  associations,  and  shall  make  such  reports  as  the 
Comptroller  of  the  Currency  may  request. 

SEC.  60.  That  any  incorporated  banking  association  may 
be  admitted  to  membership  in  any  clearing  house  association 
incorporated  under  this  Act  ;  and  the  membership  of  any 
banking  association  may  be  terminated  by  any  action  of  the 
clearing  house  association  approved  by  the  Comptroller  of 
the  Currency. 

SEC.  61.  That  each  member  of  such  clearing  house  asso- 
ciation shall  share  in  its  fees  and  other  income,  and  in  its 
assessments,  expenses,  and  losses  in  the  proportion  that  the 
sum  of  its  capital,  surplus,  and  undivided  profits  bear  to  the 


BILL   OF  HON.  J.  H.    WALKER  225 

sum  of  all  the  capital,  surplus,  and  undivided  profits  of  all 
the  associations  composing  the  clearing  house  association 
as  shown  by  the  annual  report  of  the  Comptroller  of  the 
Currency  last  made  previous  to  the  apportionment  of  the 
same. 

SEC.  62.  That  five  or  more  clearing  house  associations 
organized  under  this  Act  may  form  a  national  clearing  house 
association  upon  the  same  terms  and  conditions  as  those 
governing  in  the  case  of  clearing  house  associations  com- 
posed of  banking  associations  :  Provided,  however,  That 
national  clearing  house  associations  may  buy  and  sell  such 
bonds  as  are  necessary  to  the  conduct  of  their  legitimate 
business  to  any  amount  and  of  any  kind  approved  of  by  the 
Comptroller  of  the  Currency,  and  may  provide  for  the  coin 
redemption  of  currency  notes  of  banking  associations,  and 
may  take  and  issue,  under  the  provisions  of  section  seventeen 
of  this  Act,  the  greenbacks  described  in  section  six,  in  denom- 
inations of  not  less  than  one  thousand  dollars. 

SEC.  63.  That  any  clearing  house  association  organized 
under  this  act  may  be  designated  by  the  Secretary  of  the 
Treasury  as  a  depository  of  public  money  and  may  also  be 
employed  as  financial  agent  of  the  government. 

SEC.  64.  That  each  clearing  house  association  may  make 
loans  to  or  borrow  from  other  clearing  house  associations, 
and  banking  associations  may  make  loans  to  or  borrow  from 
clearing  house  associations.  In  all  such  loaning  and  bor- 
rowing clearing  house  and  banking  associations  shall  be 
exempt  from  the  usury  laws  of  the  States  in  which  they  are 
located. 

SEC.  65.  That  any  clearing  house  association  organized 
under  this  Act  may  establish  a  department  for  the  clearing  of 
currency  notes  of  banking  associations  in  the  current  redemp- 
tion of  such  notes. 

SEC.  66.  That  any  clearing  house  association  organized 
under  this  Act  may  deliver  to  the  Treasurer  of  the  United 
States  or  to  any  assistant  treasurer  of  the  United  States,  for 
safekeeping,  any  kind  of  money  or  bonds,  and  receive  such 
a  statement  of  the  fact  of  their  being  in  the  Treasury  of  the 
United  States  as  the  Secretary  of  the  Treasury  may  approve. 


226  APPENDIX 

SEC.  67.  That  any  banking  association  may  withdraw 
from  any  clearing  house  association,  and  any  clearing  house 
association  may  withdraw  from  the  national  clearing  house 
association  upon  such  conditions  as  the  Comptroller  of  the 
Currency  may  approve. 

These  sections  propose  to  accomplish  the  great  desid- 
eratum of  the  incorporation  of  clearing  houses  under 
government  supervision.  An  emergency  currency  is 
provided  under  sections  17,  18,  and  19,  but  the  security 
is  to  be  "  bonds  in  kind  and  amount  acceptable  to  the 
Secretary  of  the  Treasury."  Such  a  currency  would 
provide  a  market  for  the  bonds  used,  but  it  would  be  no 
benefit  to  the  commerce  of  the  country.  Wheat,  cot- 
ton, and  corn  could  not  in  any  form  be  accepted.  The 
business  community  has  no  interest  in  a  currency  so  cre- 
ated or  in  the  incorporation  of  clearing  houses  for  the 
object  of  obtaining  an  emergency  currency  in  this  way. 

National  banks  have  under  the  present  law  the  privi- 
lege of  taking  out  currency  on  pledge  of  bonds  up  to 
the  amount  of  their  capital  stock,  as  provided  in  section 
17.  But  they  do  not  avail  themselves  of  it.  In  the 
panic  of  1873  the  privilege  was  unused  to  the  extent  of 
$345,000,000,  and  in  1893  to  $427,000,000.  These 
figures  prove  that  the  privilege  of  taking  out  currency 
on  government  bonds  is  of  no  great  benefit  to  commercial 
banks.  If  section  17  allowed  bank  assets  to  be  pledged 
with  the  clearing  house  as  trustee,  by  its  bank  members, 
and  all  clearing  houses  were  required  to  accept  such 
notes  at  par,  the  provision  would  be  of  real  benefit  to 
the  business  community.  But  in  its  present  form  sec- 
tion 17  confers  no  privilege  additional  to  those  enjoyed 
under  the  present  law. 

The  functions  of  clearing  houses  described  in  sec- 
tions 62-66,  inclusive,  are  of  doubtful  value,  and  in 
many  particulars  trench  upon  the  business  transacted 


BILL   OF  HON.  J.  H.    WALKER  227 

now  by  banks.  Banks  should  be  strictly  graded,  that 
is,  all  business  that  can  be  transacted  by  the  popular 
banks  should  be  reserved  for  them.  The  higher  grade 
of  banks  should  only  perform  those  acts  which  the 
lower  grade  is  not  competent  to  do. 

It  is  further  to  be  noticed  that  the  clearing  houses  are 
not  divided  into  districts  by  States,  and  many  other 
important  provisions  are  omitted  in  these  sections.  It 
is,  however,  a  great  advance  in  the  discussion  that  the 
incorporation  of  clearing  houses  under  a  federal  law 
should  be  thus  proposed  and  ably  discussed  as  it  after- 
wards was  by  the  Committee  and  the  Comptroller  of 
the  Currency,  Mr.  Eckels. 

Mr.  Walker  considers  it  a  recommendation  to  his  bill 
that  "  it  firmly  unites  all  the  banks  in  the  country  into 
one  system  without  increasing  the  financial  responsibil- 
ity of  one  bank  for  another."  I  would  ask,  Why  should 
not  the  great  clearing  houses  of  the  country  be  willing, 
even  be  required,  to  be  responsible  for  each  other  to 
the  extent  of  accepting  at  par  the  notes  issued  by  each? 
The  banks  of  issue  of  Germany  are  compelled  to  receive 
at  par  each  other's  circulating  notes  ;  that  was  a  provision 
of  the  Indiana  state  banking  law,  and  the  same  principle 
underlaid  the  old  state  bank  systems  with  their  branches. 
If  the  state  clearing  houses  of  issue  hold  approved  col- 
lateral security  for  all  their  currency  obligations,  as 
trustees,  why  should  it  be  considered  a  great  request 
to  ask  the  banks  to  accept  themselves  the  currency 
which  in  the  first  place  they  offer  to  the  public,  when 
thereby  the  great  boon  of  stability  and  freedom  from 
panic  will  be  secured  to  the  commerce  of  the  nation  ? 

It  is  to  be  noted,  however,  that  this  firm  union  among 
the  banks  is  placed  among  the  advantages  they  will  en- 
joy from  a  graded  system,  and  none  will  acknowlege 
the  truth  of  that  statement  more  readily  than  bank 


228  APPENDIX 

officials  who  were  burdened  with  the  responsibility  of 
management  during  the  panic  of  1893. 

HON.    MARRIOTT    BROSITJS, 

member  of  the  Committee  on  Banking  and  Currency, 
House  of  Representatives,  Fifty-Fourth  Congress,  made 
the  following  statement  before  the  Committee  :  — 

I  am  unalterably  opposed  to  the  federal  government  con- 
ferring upon  any  body  of  men  under  a  free  banking  law  the 
power  to  issue  circulating  notes  on  their  own  property  under 
their  own  control. 

If  a  bank  currency  is  to  be  issued  to  conform  to  this 
opinion,  the  security  therefor  must  be  placed  with  a 
trustee,  who  shall  act  as  between  the  note-holder  and 
the  bank.  Mr.  Brosius  here  states  a  fundamental  pro- 
position, and  in  no  way  can  it  more  easily  be  carried  into 
effect  than  by  incorporating  clearing  houses  and  author- 
izing them  to  act  as  such  trustees. 

HON.    WILLIAM    L.    TRENHOLM, 

Comptroller  of  the  Currency  under  President  Cleve- 
land's first  administration,  is  the  most  recent  advocate 
of  the  incorporation  of  clearing  houses  under  a  federal 
law.  His  suggestions  to  the  Monetary  Commission 
(November,  1897)  are  as  follows  :  — 

First.  To  make  adequate  provision  for  the  recognition 
of  existing  clearing  houses  and  the  establishment  of  others 
by  allowing  them  to  be  organized  in  central  reserve  cities 
under  the  national  banking  law,  with  defined  powers  and 
responsibilities. 

Second.  To  empower  clearing  houses  thus  organized  to 
license  banks  in  their  respective  cities  to  accept  circulating 
drafts  drawn  by  banks  in  places  where  there  are  no  clearing 
houses,  such  drafts  to  be  free  of  all  taxation,  federal,  state, 
or  municipal,  and  to  be  payable  to  bearer. 


PLAN  OF  HON.  W.  L.  TRENHOLM       229 

Third.  To  limit  the  maximum  amount  to  which  any  such 
bank  may  have  acceptances  outstanding  at  any  one  time  to 
a  certain  proportion  of  its  capital  and  surplus. 

Fourth.  To  prescribe  that  no  such  bank  be  licensed  to 
accept  such  drafts  without  taking  from  the  drawers  ade- 
quate security  therefor  to  the  full  amount  of  such  contem- 
plated acceptances,  which  security  may  be  in  the  form  of 
discounted  paper  ;  also,  without  having  deposited  with  the 
clearing  house  security  to  the  amount  of  the  circulating 
drafts  applied  for,  the  sufficiency  of  such  security,  both  in 
amount  and  character,  to  be  certified  in  each  instance  sep- 
arately to  the  Comptroller  of  the  Currency  by  the  proper 
authorities  of  the  clearing  house  and  approved  by  the  local 
bank  examiner.  Securities  so  deposited  to  be  released  only 
upon  presentation  to  the  clearing  house  of  canceled  drafts, 
which  drafts  are  to  be  delivered  by  the  clearing  house  to  the 
Comptroller  of  the  Currency  for  destruction. 

Fifth.  The  circulating  drafts  authorized  to  be  accepted 
under  the  above  conditions  may  be  drawn  by  any  national 
bank,  or  by  any  state  or  private  bank  which  will  submit  to 
such  examinations  by  the  local  examiner  as  may  be  pre- 
scribed by  the  Comptroller  of  the  Currency.  The  amount 
of  drafts  of  any  such  drawer  outstanding  at  one  time  to  be 
limited  to  a  proportion  of  its  quick  assets,  including  those 
held  by  the  accepting  bank. 

Sixth.  The  circulating  drafts  so  authorized  shall  be  of 
uniform  design,  and  may  be  in  denominations  of  $1,  $2,  $3, 
$5,  and  multiples  of  $5,  having  engraved  upon  their  face 
the  name  of  the  accepting  bank,  with  blanks  to  be  filled  with 
the  names  of  the  drawers. 

Seventh.  Such  circulating  drafts  to  be  prepared  by  the 
Comptroller  of  the  Currency  and  issued  to  each  clearing 
house  association  upon  its  requisition,  made  from  time  to 
time  under  regulations  to  be  established  by  the  Comptroller 
of  the  Currency. 

Eighth.  This  plan,  if  adopted,  is  expected  to  work  in  the 
following  manner  :  A  clearing  house  association  will  from 
time  to  time  make  requisition  upon  the  Comptroller  of  the 
Currency  for  a  certain  amount  of  such  circulating  drafts  to 


230  CONCLUSION 

be  accepted  by  certain  named  banks,  members  of  that  asso- 
ciation. The  banks  for  whose  benefit  such  circulating  drafts 
are  called  for  will  satisfy  the  authorities  of  the  clearing 
house  association  as  to  their  compliance  respectively  with 
the  requirements  of  the  system  ;  whereupon  issues  will  be 
made  to  such  banks,  and  each  of  such  banks  will  cause  to 
be  filled  in  the  name  of  the  drawer  and  then  execute  its  ac- 
ceptance upon  the  face  of  the  drafts.  These  drafts  may  be 
then  sent  as  incomplete  currency  is  now  sent  through  the 
mails  or  by  express  at  a  moderate  charge,  as  they  will  not 
become  effective  from  circulation  until  duly  signed  by  the 
drawers.  When  signed  they  will  be  paid  out  by  the  draw- 
ing bank  or  banker  for  local  use  first,  and  will  gradually 
find  their  way  back  to  the  accepting  banks,  where  they  will 
be  redeemed  and  sent  into  the  clearing  house,  in  order  to 
release  a  proportionate  amount  of  the  securities  there  held 
against  such  issue.  The  object  of  this  suggestion  is  to  ena- 
ble banks  at  remote  points  throughout  the  country  to  meet 
the  local  demand  for  currency  when  it  arises,  and  only  as 
it  does  arise,  and  at  the  same  time  to  limit  and  control  such 
issues  through  the  operation  of  the  principle  of  self-pro- 
tection, which  will  assert  itself  in  the  management  of  the 
accepting  banks. 

CONCLUSION. 

These  various  opinions,  while  they  indicate  that  the 
development  of  the  clearing  house  has  been  widely  con- 
sidered, show  also  the  need  of  gathering  together  the 
arguments  and  facts  supporting  the  idea,  so  that  they 
may  not  evaporate  and  be  lost  as  factors  in  the  discus- 
sion which  must  continue  until  the  question  is  settled. 

It  will  be  noticed  that  the  suggestions  in  the  minds 
of  the  different  writers  all  came  from  experience  of 
the  satisfactory  working  of  clearing  house  certificates. 
Should  not  that  be  legalized  which  has  been  well  done 
extra  legally,  and  should  not  all  the  country  receive 
the  benefits  which  have  thus  far  been  experienced  by 
only  a  part  ?  ^ 

OF  T  A 


UNIVERSE' 

R- 


INDEX 


ACCOMMODATION,  an  enlarged,  a  rem- 
edy for  lost  confidence,  114. 

Accumulations,  dangers  from,  173. 

Ambler,  D.  G.,  suggestions  of,  for 
financial  reform,  217. 

American  and  English  finances,  insta- 
bility of,  8. 

American  institutions  produced  a  gen- 
eral banking  law,  101,  104. 

Apprehension  minimum,  the,  of  Wal- 
ter Bagehot,  18. 

avoided  by  a  trusteed  currency,  70. 
in  the  United  States,  38,  39. 

Asset-security  defined,  90. 

Assets,  the  commercial,  of  banks  form 
the  strength  of  clearing  house  cur- 
rency, 117. 

paper  money,  issued  against  those  of 
banks,  166. 

Associations  of  banks  required,  129. 

Atkinson,  Edward,  xvi. 
plan  of  secured  notes,  213. 

Bagehot,  Walter,  theory  of  apprehen- 
sion minimum  of,  17. 
Baltimore    plan,   the,   almost    unani- 
mously abandoned,  93. 
a  restrictive  one,  111. 
described,  119. 
Bank  assets  in  the  hands  of  the  banker 

or  a  trustee  give  elasticity,  90. 
Bank    currency,    history   of,    in    the 

United  States,  178. 
Bank  of  England,  formation  of,  2. 
abuse  of  powers  by,  4. 
fairness  of  dealings  of,  14. 
leads  English  banks,  16. 
no  power  beyond  its  cash  reserves, 

16. 

takes  first  step  in  panics,  17. 
protects  reserves  by  restriction,  18. 
a  standing  menace,  19. 
taken  in  tow  by  bank  of  France,  20. 
not  a  good  model,  20. 
competitive,  21. 
referred  to,  29,  42,  43,  68,  69,  102, 

103,  107,  181,  200,  202. 
suspension  of  charter  of,  15. 
Bank  of  France.     See  France,  bank  of. 


Bank  of    Germany.      See    Germany, 

bank  of. 
Bank  failures,  one  third  preventible, 

86. 
Bank  functions,  separation  of,  2,  3, 

4,5. 
Bank,  governmental,  disapproved  in 

the  United  States,  102. 
Bank,  the  United  States,  overthrown 

by  Jackson,  115. 

Bankers  have  but  an  indirect  interest 
in  the  purchase  of  silver  by  gov- 
ernment, 106. 
position  of,  regarding  a  new  system, 

93. 

Banking  act,  the  national,  affords  in- 
sufficient protection,  153. 
Banking  capital  of   the   country  all 
pledged  for  a  clearing  house  cur- 
rency, 118. 

Banking  ends  in  clearing  house,  99. 
Banking  functions,  separation  of,  1. 
Banking,  a  graded  system  of,  abolishes 

competition,  29. 
a  graded  system  compared  with  a 

competitive,  48. 

Banking  ideas,  progress  of,  181. 
Banking,  the  operation  of,  99. 

share  of  clearing  houses  in,  101. 
Banking  system,  the  American,  can  it 

be  made  more  stable  ?  8. 
the  national,  a  glory  of  republican 

institutions,  95. 
national,  completion  of,  152. 
when  broken  down,  10. 
Banking  system,  defects  in,  lead  to 

panics,  109. 

Banking    systems,    graded    and    un- 
graded, 6. 
two  classes  of,  186. 
Banking,  three  kinds  of,  178. 
Bank  notes  universally  receivable  in 

Germany,  35. 
Webster  on,  1. 
Banks  cannot  unite  on  a  plan  for  a 

new  system,  93. 

in  different  sections  classified,  72. 
in  the  East  and  West  compared,  57. 
force  liquidations,  111. 


232 


INDEX 


graded  system  of,  does  away  with 

competition,  29. 
of  high  grade  demanded,  45. 
individual,  do  not  form  a  true  sys- 
tem, 99. 

inspection  of,  100. 
of  issue  few  under  the  German  sys- 
tem, 88. 
joint    action   of,   through    clearing 

houses,  103. 
multiplication  of,  does  not  change 

principle  of  competition,  68. 
should  serve  borrowers,  47. 
the  specially  chartered,  180. 
suffer    but  slightly  from  enforced 

liquidation,  112. 
suspended,  outcome  of,  85. 
Baring  guarantee  fund,  the,  20 
Baring  panic,  the,  of  1890,  16. 
Barter,  a  strictly  cash  basis,  10. 
Bill  intended  to  provide  solid  credit, 

114. 
Bill  to  protect  credit,  features  of,  xiv., 

130-151. 
Bonds,  government,  not  a  good  basis 

for  currency,  123. 
not    held    largely    by    commercial 

banks,  205. 
Bond-secured  currency  of  little  value, 

92,  226. 

Bond-security  denned,  90. 
Bonds  as  security  for  paper  money, 

163. 
Borrowers  should  be  served  by  banks, 

xiv.,  47. 

Branch  banks,  ix.,  187. 
a  foreign  suggestion,  ix. 
Fauchier's  opinion  of,  27. 
State  banks  with  branches,  187. 
un-American,  95. 
"Bryan     States"    and     "McKinley 

States,"  72,  73. 

all  comparisons  favorable  to,  78. 
Brosius,  Hon.  Marriott,  chairman  of 

sub-committee  in  Congress,  98. 
remarks  by,  228. 
Boston  Boot  and  Shoe  Club,  213. 
Bullion  Committee,  the,  of  1810,  176. 
Bullion  Report,  the,  of  1810,  made  to 

Parliament,  19,  114,  201,  205. 
Business  of  the  country  the  basis  of 
clearing  house  certificates,  169. 

Capital,  the  banking  of  the  country 
uledged  in  a  clearing  house  cur- 
„     rency,  118,  119. 
idle,  abhorrent  to  the  business  man, 

161. 

remunerative  employment  of,  10. 
Cash   reserves  of  a  bank  not  large, 

107. 

inadequate,  17. 
Cash  valuations  universal,  80. 
Certificates,  clearing  house,  196,  230. 
issue  of,  xiv.,  42. 
type  of  an  elastic  currency,  89. 


Chartered  banks,  characteristics  of, 

191. 
Charters,   special,   granted    in    some 

States,  186. 

Checks,  the  universal  use  of,  205. 
Circulation,  profit  on,  128. 
Clapier,  M.,  opinion  of  the  financial 

system  of  France,  2. 
Clearing  house  as  trustee,  71. 
the  New  York,  features  of  certifi- 
cates of,  168. 
suspends  when  the  stock  exchange 

suspends,  64. 

Clearing  house  certificates,  196,  230. 
issue  of,  42. 
why  issued,  205. 
Clearing  house  currency,  features  of, 

126. 

plan  of  Charles  Parsons  for,  209. 
retired  when  not  needed,  173. 
sources  of  the  strength  of,  117,  118. 
very  little  would  be  issued,  96. 
Clearing  house  system,  plan  for  ex- 
tending, 197. 
Clearing  houses,  bill  to  incorporate, 


xv.,  130. 


can  be  made  a  high  grade  of  bank, 

45. 

delicate  functions  of,  100. 
enjoy  the  confidence  of  the  commu- 
nity, 124. 
incorporation  of,  under  federal  law, 

xiv.,  70. 
incorporation  of,  the  capstone  on  the 

American  system,  104. 
must  be  brought  under  federal  law, 

45. 

of  issue,  remarks  on,  116. 
must  be  organized,  100. 
Clearings  fifty  thousand  millions  an- 
nually, 99. 

Cobb,  Hon.  Seth  W.,  member  of  con- 
gressional committee  on  banking, 
98. 
Circulation,  an    unsecured,   in  1837, 

83. 
Coin,    the    immense    reserve    of,    in 

France,  30. 

balances  only  paid  in,  9. 
in  the  Bank  of  France,  24. 
paper,  to  old  expression,  vi.,  12. 
permanence  of,  as  money,  159. 
Collection,  public    not  interested  in 

modes  of,  89. 
Collections,  cash,  of  suspended  banks, 

88. 

Commerce,  Chamber  of,  in  Paris,  7. 
Commerce,  lessons  from  history  of, 

11. 
lifeblood   of,  flows   into  the   bank 

tills,  111. 

Commercial  credit,  support  of  in  Ger- 
many, 36. 

Commercial  honor,  in  England,  14. 
Commodities  exchanged  must  be  the 
basis  of  paper  money,  167. 


INDEX 


233 


Competition,  absence  of,  in  the  French 

banking  system,  28. 
between  banks  impossible  in  Ger- 
many, 36. 

between  English  banks,  29. 
in  the  United  States  system,  as  m 

the  English,  38. 

principle  of,  not  changed  by  multi- 
plication of  banks,  68. 
should  be  abandoned,  47,  48. 
system  of,  dangerous,  83. 
Comptroller  of  the  Currency  winks  at 

infraction  of  law,  43. 
Conaut,  Charles  A.,  on  the  German 

system,  32. 
Confidence  the  basis  of  the  value  of 

paper  money,  162. 
impossible  under  present  conditions, 

61,  62. 

in  a  secured  currency,  204. 
remedy  for  failure  of,  177. 
Congress,  the  country  must  look  to  for 

its  national  banking  system,  104. 
in  control  of  banks  and  currency  in 

1863,  184. 

must  be  the  source  of  a  better  sys- 
tem, 94,  95. 

must  pass  necessary  laws,  8. 
should  make  clearing  houses  a  part 
of  the  national  banking  system, 
155. 

should  not  permit  banks  to  issue 
currency  and  hold  the  security, 
202. 

Continental  finances,  stability  of,  7,  8. 
Contraction    produces    a   dangerous 
.    stringency,  66,  67. 
and  expansion  explained,  90. 
Convertibility  an  essential  of    good 

currency,  45. 

of  the  German  bank  notes,  36. 
Cooperation,  not  competition,  peace, 
not  strife,  the  law  of  banking,  70. 
Copper    syndicate,    collapse    of,    in 

France,  26. 
Corruption  resulting  from  state  bank 

legislation,  182. 

Cotton,  currency  secured  by,  safe,  82. 
Cotton,  wheat,  and  cattle,  command 
gold  in  New  York  and  Liverpool, 
80,  81. 

Country  banks,  reserves  of,  52. 
weak  spot  in  reserves  of,  53. 
Credit,  all  business  conducted  on,  108. 
loss  of,    without    infringement    of 
law,   business  mistakes  or  error 
of  judgment,  153,  154. 
commercial,  bill  to  protect,  98. 
necessity  of  upholding  it  by  legal 

measures,  11. 
protected  by  the  Imperial  Bank  of 

Germany,  36. 

Credit  currency  authorized,  20. 
Credit  Lyonnais,  the,  compared  with 

the  Bank  of  England,  69. 
Credit,  Webster  on,  108. 


Credit  system,  the,  demands  stability, 
9,  10,  13. 

origin  of,  107. 

the,  should  be  made  to  work  smooth-' 
ly,  HO. 

the  universal,  10. 

an  unprotected,  answerable  for  pan- 
ics, 107. 

Creditors  own  the  cash  in  banks,  175. 
Creed,   the  financial,   of  the  United 
States,  first  article  in,  101. 

second  article  in,  121. 

third  article  in,  124. 
Crop,  the  annual,  of  insolvent  notes, 

120. 
Currency,  a,  between  banks,  196. 

two  types  of,  89,  90. 

the  two  classes  of,  160. 

Commission,  the,  of  the  United 
States,  180. 

the  bond-secured,  inelastic,  89,  90. 

clearing  house,  should  be  limited, 
172. 

clearing  house,  elements  of  strength 
of,  169. 

common-law  right  to  issue,  183. 

common-law  right  to  issue  with- 
drawn, 179. 

important  dates  in  history  of,  5. 

disappears  in  a  day  in  time  of 
panic,  112. 

elasticity  of,  if  secured,  89. 

for  emergency,  205. 

an  emergency,  to  be  guarded,  88. 

government,  not  discussed,  11. 

the,  of  government  not  issued  in 
accordance  with  the  national 
banking  act,  106. 

issue  of,  forbidden  in  four  States, 
185. 

a  national,  benefits  of,  164. 

must  be  convertible  into  coin,  125. 

must  be  taken  by  banks  at  par,  45. 

to  be  at  par  everywhere,  the  third 
article  of  the  financial  creed,  124. 

principle,  the,  vs.  the  reserve  prin- 
ciple, 29. 

regulation  of,  1. 

regulation  of,  Lord  Overstone  on, 
199. 

a  safety  valve,  205. 

secured  and  unsecured,  192. 

a  secured,  a  panacea,  200,  206. 

a  secured,  the  second  of  the  ac- 
cepted financial  doctrines  of  the 
United  States,  121,  122. 

that  is  secured  commands  con- 
fidence, 204. 

security  of,  under  special  charters, 
193. 

a  trusteed,  relief  from,  70. 

unsecured,  contracts  with  fearful 
velocity,  203. 

Dates,  two  important,  5. 
Dead  line,  the  financial.  54,  61. 


234 


INDEX 


Debtors,   should  they   take    care   of 
themselves  ?  110. 

Debts,  foreign,  paid  by  the  West  and 
South,  80. 

Demand  payment  indispensable,  89. 

Departmental   banks  and  local  cur- 
rency proposed  in  France,  27. 

Deposit  reserves  valueless  in  an  emer- 
gency, 59,  60. 

Deposits  and  reserves  in  the  United 
States,  40. 

Depositors  bound  to  a  bank  by  favors, 
203. 

Difficulties  discussed,  72. 

Directors  in  banks  control  issue  of 
currency  in  England  until  1844, 2. 

Discount,  rates  of,  in  France,  25. 

Discount,  raising  the  rate  of,  19. 

Discounting  conservative  under  super- 
vision, 87. 

Distrust  prevents  assistance,  62. 
no  test  of  solvency,  69. 

Drummond,  Henry,  on  security,  199. 

Dunbar,  Professor  C.  F.,  on  the  Ger- 
man financial  system,  31,  32. 
on  the  credit  of  German  bank  notes, 
35. 

East  and  West,  banks  in,  compared, 

57. 

Elastic  currency,  defined,  90,  92. 
Elasticity  obtainable   with  a  secured 

currency,  89. 
Emergency  currency,  an,  205. 

Charles  Parsons's  plan  for,  209. 
England  and  France,  systems  of  banks 

compared,  28. 

England,  banking  system  of,  14-21. 
a  standing  menace  to  commercial 

peace,  19. 
where  it  fails,  14. 

England,  formation  of  the  Bank  of,  2. 
the  source  of  common  law,  181. 
panics  in,  15,  20,  16. 
theory  of  reserves  in,  17. 
England,  Bank  of,  a  central  power, 

102. 

lacks  an  essential  requisite,  29. 
the  model  in  America  at  first,  181. 
relief  from  suspension   of    charter 

of,  15. 

Equilibrium,  Peel's  law  of,  201. 
Examples  from  foreign  lands,  6,  7. 
Exchange,  the  New  York  Stock,  assist- 
ance from,  63. 

Exchanges    effected    by    paper    cur- 
rency, 167. 
Expansion  and  contraction  explained, 

90,  109. 
Expansive  method  for  relief  in  panics, 

113,  114. 
Expansive  nature  of  a  clearing  house 

currency,  172. 
Experience,  bitter,  in  1893-1897,  8. 

Failures,  in  1893,  84. 


Failures  of  banks,  one  third  prevent- 
able, 86. 

caused  by  sudden  demand  for  liqui- 
dation, 60. 

Fallacious  remedies,  65. 
Farm  products,  comparison  of  loans 

with,  77. 

ten  times  the  bank  discounts,  82. 
Faucher,     Le"on,     on      departmental 

banks,  27. 
Fellowship  among   banks,    examples 

of,  129. 

principle  of,  121. 
principle  of,  in  the  guarantee  by  all 

clearing  houses,  171. 
Fiat  notes,  a  form  of  fixed  currency, 

165. 
Finances  of  government  not  discussed, 

12. 
distinct  from  those  of  commercial 

banks,  106. 
Fixed  currency,  definition  of,  160. 

sound,  162. 

Forced  liquidations,  relief  from,  16. 
France,  bank  of,  7,  16,  22,  115. 
a    central    power    lacking    in    the 

United  States,  102. 
effects  of  its  large  reserve,  26. 
effects  of  the  war  of  1870  on  the 

Bank  of,  25,  26. 
enormous  power  of,  26. 
established,  22. 
not  a  monopoly,  23. 
privileges  and  regulations  of,  23. 
restores  prosperity,  47. 
solidity  of,  24. 
strengthens  all  the  banks  in  France, 

28,  29. 

France,  banks  of,  not  competitive,  28. 
Chamber  of  Deputies  of,  establishes 

the  Bank  of  France,  22. 
financial  system  of,  21. 
grades  in,  29,  36. 
indemnity  to  Germany,  1870,  26. 
in  1847,  97. 

panics  not  known  in,  28. 
simplicity  of   its   banking   system, 

25. 
France  and  England,  bank  systems  of 

compared,  28,  29. 
France    and    Germany,    stability    of 

banking  systems  of,  11. 
France  and  Germany,  systems  of,  com- 
pared, 34. 

Free   banking,    principle    of,     estab- 
lished, 183. 

Free  banking  law  of  New  York,  2. 
Functions    of   banks,   separation    of, 
1,5. 

Gallatin,  Albert,  on  banks  in  his  day, 
182. 

General  banking  law  does  not  contem- 
plate banks  of  great  capital,  101. 
the  first  article  of  the  financial  creed, 
101. 


INDEX 


235 


General  banking  laws  found  only  in 

the  United  States,  101. 
states  having,  187. 
universal  in  1863,  184. 
in  accordance  with  republican  insti- 
tutions, 184,  189. 
and  special  charters  compared,  188, 

190. 

development  of  banking  under,  189. 
General    publicity    demanded    under 

general  banking  laws,  191,  192. 
German  banking  system,  borrows  from 

Peel's  act,  32. 
Germany,  financial  system  of,  31. 

grades  in,  33,  36. 
Germany,  Imperial  Bank  of,  protects 

credit,  33,  36. 

power  to  increase  its  issue  ad  lib- 
itum, 32. 

Germany,  legal  reserve  of,  34. 
system  of,  88. 

and  France,  banking  systems  com- 
pared, 37. 

stability  of  banking  systems  of,  11. 
systems  of  compared,  34. 
Gilman,   Theodore,  statement  of  be- 
fore congressional  committee,  98. 
Girard,  Stephen,  bank  of,  182. 
Gold,  run  for,  produced  by  panic,  113. 
Government  bonds  not  a  satisfactory 

basis  for  currency,  123. 
finances  not  discussed,  v.,  11. 
notes  a  form  of  fixed  currency,  165. 
when  wisely  issued,  12. 
Gradation,  system  of,  ix. 
Grades  of    clearing  houses  of  issue, 

116. 

of  French  banks,  29,  36. 
of  German  banks,  33,  36. 
Greenbacks,  retirement  of,  no  remedy, 

68. 
Growth,  area  for  greatest,  in  the  West 

and  South,  73. 

Guarantee  of  the  banks  associated,  an 
assurance  of  safety,  71. 

Hill,  Hon.  Ebenezer  J.,  member  of 
congressional  committee  on  bank- 
ing, 98. 

Hoarding  currency  to  be  avoided,  127. 
done  away  with  by  the  proposed 
law,  156. 

Imperial  Bank  of  Germany,  the,  32. 

privileges  of,  88. 

Independence,  Declaration  of,  princi- 
ples of,  6,  104,  181. 
second  declaration  of,  184. 
Indiana,  laws  of  to  insure  security, 

194,  196. 

Inflation  does  not  affect  relation  be- 
tween reserves  and  liabilities,  65. 
a  hollow  mockery,  66. 
Insolvent  notes,  annual  crop  of,  12.0 
Interest,   rates  of,   irregular    in    the 
United  States,  39. 


Iowa,  laws  of  to  insure  security,  194, 

196. 

Issue,  indefinite,  theory  of,  33. 
Issue,    banks    of,   in    Germany,   only 

those  of  highest  grade,  35. 
Issue  and  discount,  separation  of,  200. 
Issue,  power  of,  liable  to  abuse,  201. 

Jackson,    President,    on    the    United 

States  Bank,  115,  182. 
his  victory,  188. 

Joplin,  Thomas,  on  protection  of  the 
public,  199. 

Kentucky,  laws  of,  in  regard  to  secur- 
ity, 194,  196. 

Ladenburg,  Adolph,  xvi. 

article  by  in  the  Forum,  218. 

Lavergne,  M.  L^once  de,  opinion  of 
the  Bank  of  France,  23. 

Law  to  incorporate  clearing  houses 
features  of,  46. 

Legislation  needed  to  cure  and  pre- 
vent evils,  44. 

Liquidation,  apprehension  of,  39. 

Liquidations,  forced,  defined,  110. 
relief  from,  16. 
severe  on  distant  communities,  79. 

Liquidation,  the  late,  has  ruined  busi- 
ness, and  relief  is  demanded,  47. 

Liverpool,  Lord,  opinion  of,  14. 
quoted,  179. 
on  a  secure  currency,  198. 

Loan  and  trust  companies  have  small 
reserves,  40. 

Loans  by  a  clearing  house  committee 
to  tottering  banks  might  be  made 
with  safety,  87. 

Loans  and   discounts,  comparison  of, 

77. 

offer  a  fallacious  protection  in  panic, 
62. 

Lombard  Street,  Walter  Bagehot's 
book  on,  18. 

London,  immense  wealth  of,  21. 

Loss  and  delay  to  be  guaranteed 
against,  125. 

Loyd,  Samuel  Jones,  influences  the 
English  banking  laws,  2,  3. 

MacLeod,  on  the  expansive  method  of 

dealing  with  panics,  114. 
on  the  fantastic  theory  of  equilib- 
rium, 201. 

on  restriction  of  credit,  113. 
opinion  on  the  action  of  the  Bank 

of  England  in  a  crisis,  20,  103. 
"  Theory  of  Credit,"  19,  30,  178. 
McCulloch,  J.  R.,  on  a  secured  cur^ 

rency,  170. 
Manufactured  products,  comparison  of 

loans  with,  77. 
Marcy,   governor,   on    paper  money, 

180. 
Metal  and  paper  currency,  159. 


236 


INDEX 


Metals,  the  precious,  qualities  of,  160. 

Monarchical  examples  antagonized,  6. 

Monetary  Commission  of  1888,  the,  7. 
of  1897,  228. 

Money,  a  common  denominator,  80, 
81. 

Money,  paper,  Charles  Moran  on,  157. 

Money  question,  the,  what  it  is,  110. 

Money,  Republican  or  Democratic,  94. 
supply  of,  diminished  by  contrac- 
tion, 67. 

Monopolies,  Secretary  of  the  Treasury 
on,  183. 

Moran,  Charles,  on  security  for  paper 
money,  157. 

Mortgages,  comparison  of  loans  with, 
78. 

Nation,    one   bank  thought  sufficient 

for,  181. 

National  banking  act,  the,  42,  184. 
National  banks,  reserves  of.  50. 
Nevada  desires  to  relegate  control  of 
banks  to  the  national  government, 
185. 
New  York,  bank    of    the    State   of, 

report  by,  in  1837,  179. 
financial  law,  1838,  122. 
free  banking  law  of,  2. 
law  of  1838,  198. 
New  York  and  Ohio  systems  examples 

of  general  laws,  190. 
North,  the,  adopted  general  laws,  190. 
Note    circulation     of    the     Bank    of 

France,  24. 
Note-holder,  the,  at  a  disadvantage, 

123. 
needs  a  trustee  because  he  cannot 

investigate  the  banks,  123. 
Note-holders  have  no  feeling  for  the 

banks,  203. 

necessarily  act  for  themselves,  203. 
Notes,  insolvent,  should  be  paid  before 

the  liquidation  of  the  bank,  126. 
mutually    exchangeable     in     Ger- 
many, 32. 

to  be  issued,  limited  under  special 
charters,  192. 

Ogden,  J.  de  P.,  on  banks  of  issue, 

199. 
on    the    importance   of    the    New 

York  banking  law,  184. 
Over-issues,  people  of  the  United  States 

opposed  to,  12. 
Overstone,  Lord,  on  banking,  199. 

Panama  Canal,  collapse  of,  26. 
Panic,  definition  of  a,  21. 
the,  of  1837,  1. 
the,  of  1837,  origin  of,  200. 
losses  by,  estimated  at  six  thousand 

millions,  109. 
the  "Baring"  (1890),  10. 
of  1890,  in  England,   united  action 
of  banks,  103. 


of  1893,  a  test  period,  152. 

of  1893,  incident  in,  63. 

might  have  been  stayed   by  slight 

assistance.  86. 
inaugurated  by  forced  liquidations, 

16. 
Panics,   the,  of  1884,  1893,  and  1895, 

108. 

are  they  begun  by  banks  ?  42. 
arise  in  England  and    the  United 

States,  30. 
begin    in  England   and   the  United 

States,  7. 

bill  to  prevent,  114. 
can  only  be  prepared  for  by  arrange- 
ments made  on  general  principles, 
84. 

causes  of,  93. 
come  like  squalls,  without  notice, 

84. 

do  not  arise  in  Germany,  34. 
do  not  occur  in  France,  28. 
freedom  from,  demanded,  10. 
immunity    from,  guaranteed   by  a 
clearing  house  currency,  126,  127. 
importance  of  preventing,  176. 
losses  by,  109. 

money  loss  from,  incalculable,  112. 
nature  of,  107. 
protection  from,  174. 
ravages  of,  11. 

result  from  a  loss  of  credit,  115. 
safeguards  against,  105. 
stopped  by  forced  liquidations,  111. 
two  methods  of  dealing  with,  109. 
why  do    they    rise  in  the  United 

States  ?  13. 
warded    off    in    Germany    by  the 

Imperial  Bank,  35. 
Paper  currency  requires  safeguards, 

166. 
Paper    money,     Charles    Moran    on, 

157. 

Paper  money,  to  coin,  12. 
Paris,  Chamber  of  Commerce  of,  7. 
Parsimony,  the  law  of,  161. 
Parsons,  Charles,  statement  of,  209. 
Passing  the  ring,  game  of,  69. 
Peel,  bill  of,  founded  upon  the  cur- 
rency principle,  30. 
charter  of    the  Bank    of  England 

enacted,  2. 

law  of  equilibrium  of,  201. 
Peel's  act  characterized  by  Professor 

Dimbar,  31. 
Peril  from  the  condition  of  the  banks, 

64. 

Political  principles,  fundamental,  6. 
Politics  in  banking,  94. 
Price,  Professor  Bonamy,  on  a  means 

of  controlling  a  crisis,  19. 
Property,  comparison  of  loans  with, 

77. 

Prussia,  mutual  exchange  of  bills,  32. 
Public,  the  general,  the  reservoir  of 
currency,  111. 


INDEX 


237 


Receivership,  threat    of,    disastrous, 

61. 
Redeemable  currency    defined,    160, 

165. 

Redemption  agencies,  fallacious  reme- 
dies, 69. 
Redemption  of  currency  by  clearing 

houses,  88. 
Re-discounting  a  safe  use  of  money, 

97. 

Reichsbank,  the,  of  Germany,  elasti- 
city of,  31. 
Republican  banking  system,   how  it 

can  be  made  preeminent,  70. 
Reserve  of  the  Bank  of  France,  24. 
Reserve,  good  effects  of  the  large,  in 

the  Bank  of  France,  26. 
of  the  Imperial  Bank  of  Germany, 

34. 

what  is  a  safe  ?  41 . 
an  immense,  provided  by  incorporat- 
ing clearing  houses,  46. 
a,  obtained  without  cost,  46. 
should   be  established  and  secured 

by  law,  154. 
Reserves  above  legal    requirements, 

53. 
average  cash,  of  commercial  banks, 

40. 
condition  of,  in  the  United  States, 

49. 

of  national  banks,  50. 
of  in  cities,  55. 
of  country  banks,  55. 
decline  of,  produces  solicitude,   39, 

40.   » 

in  deposits,  50. 
in  lawful  money,  50. 
must  not  be  costly,  45. 
offer  a  common  standard,  51. 
percentage   of,   to  demand  obliga- 
tions, 52. 
protection  of,  a  guarantee  of  safety, 

71. 

question  of,  10. 
how  restricted  in  the  United  States, 

38. 

small  loss  of,  produces  panic,  43. 
smallness  of,  54,  58. 
surplus,  percentages  of,  56. 
theory  of,  in  England,  17. 
Restriction  and  expansion,  109. 
and  extra  legal  measures,  10. 
Robinson,  F.  J.,  opinion  of,  14. 
Rothschilds,  the,   opinion  of   French 

solidity,  8. 
Runs  on  banks,  203. 
creditors  trained  for,  175. 

Safety,  elements  of,  71. 

Safety    valve,     none     now     existing, 

127. 

a,  provided  by  currency,  205. 
Sampson,  Mr.,  of  the  London  "  Times," 

opinion  of,  110. 
Savings  banks,  danger  to,  158. 


Scotland,  mutual  exchange  of  bills,  32. 
Secured  currency,  advantages  of,  192, 

206. 

described,  122. 
either  rigid  or  elastic,  92. 
principle  of,  from  England,  200. 
Securities,  convertible  and  inconvert- 
ible, 63. 

Security,  collateral,  with  a  trustee,  the 
demand  of  the  business  commu- 
nity, 122. 
Security,  how  attained,  45,  193,  196. 

two  kinds  of,  90. 

Sherman,  Hoyt,  address  to  Iowa  bank- 
ers, 121. 

on  the  Iowa  system,  195. 
on  the  principle  of  fellowship,  121. 
Sherwood,  Professor  Sidney,  sugges- 
tions by,  in  "  Review  of  Reviews," 
221. 
Silver  scare,  the,  precipitates  a  panic, 

108. 
Smith,  Adam,  on  the  first  failure  of 

the  credit  system,  107. 
"  Wealth  of  Nations,"  170. 
South,  the,  adopted  special  charters, 

180. 
South  and  West,  the,  suffer  most  from 

a  bad  system,  79. 
Southern  States,  large  percentage  of 

lawful  money  in,  72. 
Special  charters  and  general  laws  com- 
pared, 188. 

Special  charters  monarchical  in  char- 
acter, 189. 
Specie  payments  the  third  article  of 

the  financial  creed,  124. 
Stability  of  the  earth  no  more  need- 
ful than  financial  stability,  128. 
Stability    obtained  by    incorporating 

clearing  houses,  46. 
two  conditions  of,  9. 
the  first  requisite,  9. 
demanded  in  all  parts  of  the  land, 

xii.,  158. 
State  banks,  origin  of,  181,  182. 

with  branches,  ix.,  187. 
State   system,  the,  has  its  source  in 

democratic  legislation,  95. 
State  systems  in    the  United  States, 

mutual  exchange  of  bills,  32. 
States,  the,  of  the  Union,  classified, 

72. 

boundaries  of,  should  be  recognized 
in  establishing  clearing  houses  of 
issue,  116,  117. 

Suffolk  banking  system,  the,  193. 
Sunnier,    Professor,    on    the    Bullion 

Report,  114. 

opinion  of,  on  bank  notes,  115. 
test  of,  met  by  clearing  house  cur- 
rency, 119. 
Supervision,     the     capstone     of    the 

American  system,  104. 
by  clearing  houses  salutary,  87. 
Suspended  banks,  outcome  of,  85. 


238 


INDEX 


Suspension  of  bank  facilities  from  loss 

of  reserves,  58,  60. 
Surplus  reserves,  small,  54. 
Switzerland,  mutual  exchange  of  bills, 

32. 

Table  I.     Reserves  of  national  banks, 

51. 

Table  II.     Surplus  reserves,  54. 
Table  III.     Percentages  of  surplus  re- 
serves, 56. 

Table  IV.     Comparative  reserves,  57. 
Table  V.     Deposit  reserves,  59. 
Table  VI.     Financial  statistics  of  all 

States,  74,  75. 
Table  VII.     Percentage  of  assets   to 

obligations,  76. 
Table   VIII.      Banking    situation    in 

seven  Southern  States,  82. 
Table  IX.     Suspended  national  banks 

of  1893,  86. 

Table  X.     Cash    collections  of    sus- 
pended banks,  88. 
Tariff,  the  Wilson,  produced  distress, 

68. 
Tariff,  a  sufficient,  the  panacea  for 

governmental   financial  troubles, 

106. 
Test  period  of  the  American  banking 

system,  152. 
Torrens,    Col.,  on   a  mistake   of  the 

Parliament,  202. 
responsible  for  a  change  in  English 

banking  laws,  2. 
Trade,  laws  of,  regulate  the   amount 

of  currency,  161. 
Trenholm,  Hon.  W.  L.,  suggestions  to 

the  Monetary  Commission,  228. 
Trustee  currency,  122. 
Trustee,   services  of   a,   required  by 

the  note-holder,  122,  123. 
Trusteeship  favors  elasticity,  90, 


United  States  Bank,  the,  115,  181. 
overthrow  of,  182. 
revival  of,  desired  by  some,  95. 
United  States  bondholders  do  not  need 

aid,  92. 

United  States  law  at  present  inade- 
quate to  sustain  the  credit  sys- 
tem, 10,  11. 

United  States,  financial  system  of,  38. 
has  all  the  defects  of  the  English, 

38. 

how  to  be  made  preeminent,  70. 
Unions   of    banks  would    strengthen 
national  life,  129. 

Venezuela     message    precipitates    a 

panic,  108. 
Virginia  and  Maryland   examples  of 

the  special  charter  system,  190. 

Walker,  Hon.  J.  H.,  xvi. 

provisions  of  a  bill  of,  223. 
Washington,  remark  of,  on  influence, 

202. 
Wealth,  accumulated,   difference   in, 

72. 

Webster,  Daniel,  on  currency,  vi.,  1. 
on  credit,  108. 
on  functions  of  banks,  199. 
on  banks  and  borrowers,  xii. 
in  favor  of  paper  universally  con- 
vertible, 97. 
views  about  regulation  of  currency, 

2,4. 
West  and  East,  banks  in,  compared, 

57. 
West  and  South,  the,  suffer  most  from 

a  bad  system,  78. 
Western  States,  large  percentage  of 

lawful  money  in,  72. 
Wilson  tariff,  distress  produced  by, 
68. 


ftifoersi&e 


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